What happens when an appraisal comes in below the contract price agreed upon by the buyer and seller in a real estate transaction? Well, most of the time, when a low appraisal does come in, we will have already been expecting it; due to the nature of our very competitive real estate market, a lot of buyers are overbidding the asking prices of houses, oftentimes exceeding the value that an appraiser is willing to assign.
The first questions we ask ourselves when we get a low appraisal on a real estate transaction: “Did the appraiser make a mistake? Can we identify any human error?” We’ll comb through the report to see if that’s the case. As you may or may not know, appraisals are based on comparable sales that are similar to the property in question.
So, for example, if the appraiser is comparing a home to another that’s bigger, or using a two-story house to appraise a single-story house, that’s a red flag; we can take that report back to the appraiser manager and make a strong case that there needs to be an adjustment on the appraisal. However, more often than not, appraisers aren’t going to change the value—a successful petition for adjustment is rare.
Once we have a final appraised value (adjusted or not), we present it to both the buyer and the seller and begin an important conversation. Is the buyer willing to pay more than the appraised value of the home up to the contract price? Is the seller willing to take less than the contract price equivalent to the appraised value? Or, is there a middle ground that can be reached? If the answer to any of these questions is ‘yes,’ then we’re able to move forward.
If, however, the answer in each instance is ‘no,’ then the buyer has a right to cancel the transaction per the appraisal contingency. As mentioned above, though, low appraisal scenarios seldom catch us by surprise. In anticipation of a low appraisal, we implement a proactive strategy, like drafting an agreement that states the buyer will pay X amount of dollars over appraised value, etc.
If you have further appraisal questions or are thinking about buying or selling a home soon here in the new year, please feel free to reach out by phone or email. I’m always available to help with whatever real estate needs you may have.