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. 

Appraisal issues a never ending battle…

As much as the market has been straining to break out of the recent recession and regain lost property values, one component of the market has been acting as an anchor, holding back or at least significantly slowing the positive progress. That component is the dreaded appraisal. I say dreaded, because it has become the biggest obstacle to sales these days. The house can be in move-in ready condition with a clean bill of health from the home inspection and still have the sale

queered by a low appraisal. That’s happening a lot these days. Why is that?

One of the constant battles that go on in the real estate market is that between the Realtors involved in listing the houses and the appraisers over what the market value of the house should be. Appraisals can be the cold splash of reality in the face for many sellers. Appraisals take all of the emotion out of the process of putting a market value on your property.  The battle over market value is one that is likely to continue forever, just due to the different natures of the two sides in this argument.

Realtors, especially listing agents, tend to be optimistic and they also tend to bake the direction of the market into their listing pricing. In a rising market, like we have now, it is quite easy to miss the market on pricing, either low or high. If the listing agent prices the property too low, it might sell quickly; but, the seller will not have gotten the most out or the sale. If, on the other hand, the listing agent is too aggressive with pricing the property for a rising market, he may price it too high and it will just sit there, waiting for the market to catch up.

Appraisers go at value pricing from a different perspective. They are required to use sold comparable properties as a barometer of the market; thus their data is always trailing the market, sometimes by as much as 6 months. In a rapidly rising market that almost always means that they miss the value on the low side. For a long while appraisers were also forced to include the sales of foreclosed and short sale properties in their comparable properties. Fortunately much of that business is behind us now, but there are still a few of those types of sales that were done in the last few months that can affect appraisals.

Another major factor in many appraisals is something that the seller can’t do anything about – the style of the house. House styles come and go, with each decade usually having some dominant style. There are a few “classic styles” – ranches and colonial, for instance, that never really go out of style, but which might be less desirable than a more modern architectural style. For the past couple of decades the 1 ½ -story or Cape Cod seems to be the preferred style. Split levels, which were all the rage in the late sixties and seventies, have really fallen out of favor as a style. Those style preferences show up in the appraisals. Bi-levels, tri-levels and quads definitely appraise lower than ranches, colonials and Cape Cods of the same size. Homes that were sometimes classified as modern or contemporary when built can also fall out of favor, since many of them have very unusual floor plans.

What can you do about all of this as a homeowner who wishes to sell? Not much about the style issue; but you can make sure that your house is the best one of whatever style that it is on the market. A house in great, move-in ready condition will still attract buyers. Another thing that sellers can do is to compose a list of the updates and upgrades that they have put into the house, hopefully not too long ago. It is not obvious to the appraiser exactly when the roof was replace or a new furnace put in, but those things make a difference. Some updates, like granite counter tops will be obvious, but many others may benefit from being pointed out for the appraiser. Taking care of the many little “deferred maintenance” items that you may have been putting off can also help by removing those value detractors.  

Another thing to do is seek professional advice. Get a good Realtor to do a Market Analysis for your home and then follow his/her advice. You don’t need to fight with both the Realtor and the appraiser. Call me and I’ll help you understand more about the market value of your home and what you can do to improve it.