The appraisal came in too low. What do I do?

 Understanding the Real Estate Process from A – Z – A Buyer’s Guide to Real Estate – Part 12

This is the twelfth post of a series in an FAQ format that I hope will help would be buyers better understand the real estate process that they are about to go through. There is a follow-on series to the posts for real estate sellers.

FAQ  –  The appraisal came in too low. What do I do?

Once again, don’t panic. There are several reasons that the appraisal may have come back lower than

the selling price. One is obvious – the place is overpriced and the value is just not there to support the sale price.  A second is that the appraiser might not have done a good job of assessing the house’s value. He or she may not be familiar with the area and have picked the wrong “comps” to compare the house to (which happens sometimes when out of area appraisers are assigned the appraisal). In general, experienced and competent appraisers will be able to do a good job of rendering an opinion of value, even if they are a bit out of their normal territory.

So, what do you do now? Your mortgage company is not going to write a mortgage on the place if it is significantly below the value of the price that you have agreed to pay. The ball is back in your court. You can throw the ball over to the Seller by letting him know that the appraisal came in low and asking him to reduce his price to match the appraised value; or, you can decide to make up the difference yourself, if you are confident that the values are rising and will eventually reach or surpass the sale price; or, you can try to reach some compromise with the Seller. Quite often the last choice is the one that works.

If the seller refuses to budge off the price that he agreed to you really only have two choices – kick in the extra money on the deal above what the mortgage company will finance in order to reach the sale price; or, walk away from the deal. Many times Buyers are reluctant to take that final option to walk away because they have real money already sunk in the deal, as well as emotional momentum to go ahead with it. The Buyer at this point has probably spent close to (or more than) $1,000 on the home inspection and the mortgage costs (the appraisal fee and any other application fees). That is sunk money that they will not get back. If they walk away at this point they will get their Earnest Money Deposit back.

Many times the Buyers are pretty well tapped out at this point, because of the expenses that they have already incurred and the closing costs that are yet to come. That may force them to seek some additional financial help, maybe from mom and dad, or to work with their mortgage person to try a different mortgage approach – perhaps with a different mortgage product that will free up some cash to be used to pay down the appraisal difference. 

Most of the time the Sellers are willing to work with the Buyers to adjust the price. Perhaps they priced too high to test the market and realize that the appraisal price is actually a good number for their home. It may take them a little while, because they have to give up on the euphoria of having gotten such a good price for their house. They will come to realize that they appraisal price probably does represent the “market value” and that the Buyer that they have in hand is better than going back on the market to try to find someone else who might be willing and able to pay above  the market price.

The best course of action is to listen to the advice of your Realtor® and let them do their negotiating

job on your behalf. Both of the Realtors involved have probably been through this before and know how to navigate these tricky waters. Either, or both, of the Realtors may advise trying to get a second appraisal is they agree that the appraiser did a lousy job.  There will probably be some negotiation about who pays for that second appraisal and your will need the agreement of the mortgage company underwriter to accept the results.

At some point, you will reach a sale price that reflects the market value and one that the mortgage company can support. If that is still below what you and the Seller can agree upon, it is time for some soul searching. In a market like the one that we are in right now, with low inventory and high prices, it may well be that you will have to accept starting over on your search and perhaps resetting your priorities and criteria. The only alternative is to find a way to finance the added cost above the

appraisal value, if this is truly the house of your dreams.

Life is full of compromises and this is a big one. You risk being “house poor” for some time or having to kick in the money that you had held back for updates or repairs, in order to move ahead. Just be darn sure that this is a place that you will want to stay in for at least 7-10 years, because it will take you that long to recoup the extra cost in appreciation. If you are young and working in an industry in which promotions may mean moves, this is probably not a wise course for you. If you are in a stable position where advancement won’t require moving, then you will probably be OK over time.