Your Appraisal is Lower Than the Offer - Now What?
A home appraisal is something that your mortgage lender will require when you buy a home. The reason is that they want to be sure that the value of the collateral supports the loan amount you are applying for.
In most cases, the home appraisal is completed without any problems. But, what happens if your appraisal comes in lower than the offer you made? In that case, you'll need to address the appraisal gap before you proceed. Here's what you need to know.
What Are the Differences Between Home Appraisal and Market Value?
We sometimes talk to first-time home buyers and find that there's some confusion between the appraised value and the market value of a property. These terms may sometimes be mistaken for one another but they do not mean the same thing.
Things That Impact Market Value
The definition of market value is simply what a buyer is willing to pay for a house. If you pay any attention to the real estate market, you know that the purchase price of a home can fluctuate depending on the condition of the housing market.
There are several factors that can impact the market value of a property. Here are the most important things that can drive the sale price of a house:
Comparable sales. Homeowners and real estate agents run what's called a comparative market analysis or CMA when they set an asking price for a home. The CMA analyzes sales of similar properties to determine what buyers are willing to pay.
Inventory levels/buyer demand. Every commodity in the world is driven by the laws of supply and demand. When many homes in an area are for sale and there are few buyers, prices will be lower and therefore more advantageous to buyers. When the reverse is true, with few properties for sale and high buyer demand, prices will increase as a result.
The property's condition, age, amenities & features. The final factor that plays a role in a property's market value is the property itself. If you're looking at a house that's relatively new and has an in-ground pool, it will likely have a higher asking price than a house that's older and has a small yard with no pool. Older homes that have not been updated can be less marketable.
As a buyer, you'll want to work with your real estate agent to determine a reasonable offer price based on the home's fair market value. When you look at comparable sale information, you'll need to be sure that you're eliminating factors that can skew the market value, such as parents selling a house to their children or someone who's selling to avoid a foreclosure.
Things That Impact Home Appraisal
It might not be surprising to learn that many of the same elements that impact a property's market value also play a role in determining the appraisal value. The appraiser will look at the comparative market analysis to get a handle on the sale prices of similar properties in the area.
To determine home value, the appraiser will make an in-person visit to the property. Most appraisers use the Universal Residential Appraisal Report developed by Fannie Mae during their visit.
The appraisal report includes the following things:
The appraisal is used to determine the property value based on a combination of market conditions plus specific features and issues with the property being purchased. While it is common for the appraisal and the asking price to be similar to one another, a huge gap can indicate a problem and a correction to the report or even second appraisal may be necessary.
How to Challenge a Low Appraisal
What should you do if you get a low appraisal that leaves a gap from the purchase price for the property you want to buy? One option is to challenge the low appraisal by doing some research and writing an appraisal rebuttal.
Research Issues Affecting the Home's Value
A good place to start your research is by digging into the details of the appraisal report. Make notes of things like market research, square footage, and anything else that might have impacted the appraisal. Then, ask the seller’s real estate agent how they arrived at their asking price.
Let's look at a hypothetical situation. You might receive the appraisal and notice that the appraiser's square footage is lower than the square footage on the listing. In that case, the best bet would be to remeasure the house and determine which number is correct. If the appraiser's measurement is off, correcting it could be enough to bring the appraisal value in line with the sale price.
Another hypothetical might be if a real estate agent discloses that two homes in the area were sold to family members at a discounted price. In that case, you could include the information in your rebuttal to see if the appraisal can be revised to use different recent comparable sales in the area.
The primary things to look for when evaluating a low appraisal are:
The property history (discounted sales, notoriety, etc.)
Property details, including square footage, number of bedrooms, and amenities
Recent comparable sales
When you're gathering information, make sure to document everything because you will need supporting evidence to write your rebuttal.
Tips for Writing an Appraisal Rebuttal
Now, let's talk about how to rebut the appraisal’s value. Your rebuttal letter should be polite and as brief and as informative as possible. We suggest a short opening paragraph, a bullet list of factors that you believe may impact the appraisal, and a respectful request to revisit the appraisal.
Here are some pointers to help you.
Focus on the "meat" of the appraisal, which means the comparative analysis and price adjustments.
Find new comps for the appraiser to consider, but make sure they are truly comparable. Don't point them to a larger home in a different area. If you would consider a property as a replacement for the one you want to buy, then it is a valid comparison.
Keep emotion out of it. Using bullet points that stick to the facts will help you stay focused.
Ask questions. For example, if you provide a different comparable and the appraiser did not make an adjustment, point it out and ask (respectfully) why it was not included.
Stick to five to 10 bullet points at most. Use details; for example, make sure to include the addresses of any comparable properties you mention.
Conclude with a request for the appraiser to take a second look based on the data you provided. Do not suggest an appraisal value or ask for an increase in the appraisal. Let the data do the talking.
Suggestions to Overcome a Low Appraisal
What happens if you rebut the appraisal and the revised appraisal is still less than the contract price you've agreed to pay? Here are some suggestions to help you overcome a low appraisal.
Increase Your Down Payment
The first option is to make up the difference between the appraised value and the loan amount in cash. If you have enough savings to take advantage of this solution, you won't need to worry if the lender won't give you the full amount you initially requested. The mortgage lender's primary concern is the loan-to-value ratio, so a larger down payment can close the gap.
Private Mortgage Insurance
The second option is to take out private mortgage insurance with a limit that will satisfy your lender. PMI provides some protection to the lender when the LTV is above 80% and may alleviate their concerns regarding the gap between the appraised value and the loan amount.
If you don't have the cash to increase your down payment or pay for private mortgage insurance, you may want to consider going back to the seller and renegotiating the contract price. This is the best option if you have unsuccessfully rebutted the appraisal or if you feel that the appraisal was accurate and consequently, that the asking price was too high.
Keep in mind that renegotiation may be easier if the property you're buying has been on the market for a while. If the appraiser refused your request to reconsider the appraised value, then you may be able to use their refusal as leverage with the seller.
You may consider researching comparable sales, which can benefit you in two ways. The first is with the appraiser, since if you can provide multiple comps that are higher than the appraised value, the home appraiser may reconsider the value of the house.
The second is that if you find comps with lower sales prices, you may be able to use that information to renegotiate with the seller. It's not uncommon for owners and real estate agents to ask for a higher amount than they can reasonably get and you may be able to prove that point with research.
Back Out of the Deal
The final option is to back out of the deal entirely. If the appraiser doesn’t agree with your rebuttal and the seller is unwilling to negotiate, you always have the option of walking away. Although it might be disappointing to have a sale fall through at the last minute, it may be the only solution if you can’t remedy the situation in one of the ways we have mentioned here. You also want to consider whether you want to pay more for a house than it is truly worth according to the local real estate market.
It’s here that the terms of your purchase agreement will come into play. If you had a contingency regarding the appraisal, you might be able to get your earnest money back. However, if your contract had no such contingency and you’re past the date when your contract says you can back out, you may forfeit your earnest money to the seller.
The bottom line is that a low appraisal is not necessarily a deal breaker if you're willing to do some research and figure out why there's a gap between the appraised value and the price you agreed to pay. The tips we've included here can help you to navigate the process and get the home you want.Choosing the right lender is a must if you want to have a smooth mortgage process. SIRVA Mortgage is here to help. Get started now!