Low home appraisals can be deal breakers but there are ways to work with them as a real estate agent, whether you're helping a buyer or a seller. When housing markets are declining, low appraisals are common due to lack of comparable home sales in the area. This makes it difficult for the appraiser to determine the current market value of the home which can lead to a low appraisal. If your client is faced with a low appraisal, options exist that can satisfy both sides of the contract.
Let's say your seller gets an offer below asking price and accepts. The appraisal comes in a week later and, unfortunately, it's lower than the offer. Suddenly the buyer thinks he/she is going to have to come up with more cash. The disappointed seller is left with a lower-than-list-price offer and fears he/she may have to drop the price again.
Let's backup and start from the beginning. A seller should start by choosing a local, qualified appraiser with a residential certification with a professional designation (ex. SRA, MAI). This will give them a more accurate appraisal. The following should also be considered:
- Get a walk-through appraisal before listing the home
- Low appraisals should be questioned before putting the home on the market
Getting an appraisal before the house goes on the market can save the seller a headache when the time comes to entertain an offer. The seller should walk through the house with the appraiser to point out any improvements or upgrades. This will prevent important aspects of the home from being overlooked and left out of the report. If the appraisal comes in significantly lower than predicted, take time to evaluate it before putting the house on the market.
Also, let your clients know there is a difference between a walk-through and a drive-by appraisal. A walk-through appraisal is more thorough than a drive-by, including an exterior and interior inspection. The appraiser will measure the square footage, take into consideration home renovations, and look at the quality and condition of the construction, as well as compare findings to existing home records.
With a drive-by appraisal, the appraiser simply drives up to the house and considers the condition of the exterior. This type of appraisal is typically less expensive than a walk-through appraisal but less thorough. In order to gather information about the condition of the interior, a drive-by appraiser looks at MLS records, county records, and previous appraisals, among others. In other words, the appraiser is relying on information from outside sources not what he/she has seen from walking through the home. Inaccuracies can exist with either type of appraisal, especially if the appraiser's in a hurry, but the walk-through is the most accurate choice.
Keep in mind, some lenders work with specific appraisal management companies whose appraisers may not be familiar with the geographic area. Oftentimes, inaccurate appraisals result from lack of knowledge. To avoid this, buyers and sellers should make sure a local appraiser is hired.
If the buyer's appraisal comes in low, it's in the best interest of the seller to share their appraisal with the buyer's appraiser. This gives the buyer's appraiser an opportunity to compare how the house was originally evaluated, possibly leading to a price adjustment. Unfortunately, the price may still be out of balance. If that's the case, it's time to consider some new options:
- Buyer pays cash for the difference
- Buyer pays closing fees for the seller
- Dispute the appraisal and order another one
- Seller lowers the price of the home
- Seller financing (ex. carries a second mortgage)
- Compromise: seller lowers price, buyer pays some of the difference
- Seller puts the home back on the market
As a real estate agent, you could also try the following:
- Provide a list of comparable sales to the underwriter
- Ask buyer/seller to compromise on the price
- Cancel the transaction
In addition, consider how fast the market is moving, how fast home prices are increasing. Comps from 6 months ago might not accurately reflect the changing market, resulting in a low appraisal. If homes are selling for $50,000 more than they were 6 months ago, when the seller put their house on the market, the original comps are not going to reflect current market value. When home prices are quickly climbing, gather and review up-to-date comps with your client to determine if the appraisal accurately reflects current pricing.
Low appraisals are part of the trade especially when housing markets are on the decline, home prices are climbing rapidly, or when foreclosures and short sales exist. Fortunately, there are a variety of options for buyers and sellers to take advantage of when faced with a low appraisal. Much of the time, a compromise or other funding can resolve the issue and close the deal. Whatever the solution, educate your client about low appraisals and provide options so they can decide what's best for their situation. The information you share could lead to a closing and a future referral.