There are a number of reasons why appraisals come in low:
- Artificially inflated prices resulting from multiple offers.
- Declining market values due to fewer buyers .
- Fallout from an abundance of foreclosure or short sales in the neighborhood.
- Incorrect evaluation by the underwriter.
- Overpricing by the seller.
- Inexperienced appraiser who doesn’t understand influences on value.
- Appraiser overlooked pending sale data, which could reflect higher comparable sales when closed, or the appraiser selected comparable sales from the wrong neighborhoods.
- Buyer receives cash back from the seller, causing lender to believe the price has been inflated.
One factor that does not come into play is whether the lender wants to make the loan.
Lenders want to lend money, and lenders are prohibited from redlining.
Solutions for Low Appraisals
Don’t panic if the appraisal comes in low. It’s tough to remain calm when it appears the pending sale will fall apart, but both parties have options:
- Buyer can make up the difference in cash.
- The seller can lower the price.
- The seller can offer to carry a second mortgage for the difference.
- Order a second appraisal.
First, if your loan is an FHA loan, ask the lender for a list of approved appraisers. Either the seller or the buyer can pay for the second appraisal. Sometimes the second appraisal will come in higher than the first, especially if the first appraiser was inexperienced or made mistakes.
If your loan is a conventional loan, then it is subject to the rules of the Home Valuation Code of Conduct (HVCC).
- Supply a list of comparable sales.
- Also, ask the agents to call the listing agents of pending sales to try to find out the actual sales price of those properties. Listing agents do not have to disclose the sales price, but many are happy to help out because they could find themselves in the same situation. You can always ask if the agent thinks your price will appraise if the agent refuses to divulge the pending price.
- Compromise on the value. Sometimes sellers will back off a little bit on the buyer paying the entire difference and will settle somewhere between a full cash contribution and completely lowering the price. Regarding a difference of say, $10,000, a seller might agree to accept $5,000 in cash and lower the price by $5,000.
- Cancel the transaction.