The appraisal came back low – Now what?
Before the new HVCC rules concerning home appraisals went into effect on May 1, 2009, I did not have any of my own stories to tell of apprasials coming in low. This is no longer true as I now have two of my own stories to share of low appraisals. Both of the low appraisals were in real estate transactions in which I represented the buyers.
In the first scenario, the difference between the sales price and the appraised value was 0.7%. Since the difference was so insignificant it was relatively easy for the sellers and my buyers to come to terms on how to deal with the difference and move forward with the transaction.
In the second scenario, the difference was significantly greater as the appraisal came in at 12.5% lower than what the buyers had agreed to pay for the home. Before we had written the offer, I had sat down with the buyers to review the comps. It was at that time I suspected we may have a problem with the appraisal because there were no recent sales of true similar Spring Texas homes to be found.
Faced with a low appraisal the buyers had to decide how they were going to deal with it. They could
Appeal the appraisal – The listing agent and / or buyer’s agent can discuss the appraisal with the appraiser and provide comps other than the ones selected by the appraiser for consideration.
Get another appraisal – The buyers could get another appraisal and hope the next appraiser used different comps resulting in a higher appraised value.
Adjust the sales price down to the appraised value – The buyers could ask the sellers to lower the agreed upon sales price to the appraised value but the sellers are under no contractual obligation to do so.
Negotiate – Buyers and sellers could agree to a revised sales price with both parties sharing in the disparity between the original sales price and the appraised value. Neither party is under any contractual obligation to do so.
Pay the difference – If the buyers believed the agreed upon sales price was a fair price they could pay the difference between the sales price and the appraised value. The buyers would not be able to finance the difference. Thus in order for the sale to go through the buyers would need to have the extra cash and be willing to bring it along with their down payment to closing.
Terminate the contract – In the Special Provisions section of the real estate contract we had written in “If the property does not appraise for an amount equal to or greater than the sales price, buyers may terminate the contract and the earnest money will be refunded to buyers” providing the buyers with the legal right to terminate the contract. The buyers would lose the money they spent on the appraisal, inspections, and the option fee but they would be refunded to their earnest money.
My buyers didn’t want to terminate the contract because they still wanted the house but they weren’t interested in paying the $40,000+ difference either. After some additional research I found older but better comps. The comps were custom homes and the home my buyers had under contract was a custom home. The comps the appraiser had chosen were recent comps but the homes were tract homes and not custom homes. I sent the appraiser the comps and asked him to reconsider his valuation. Strike one … appraiser was sticking with his valuation.
Next, we ordered another appraisal. We believed the first appraiser did not use comps of the same caliber of home as the subject home. We waited and hoped the value of the second appraisal would come in higher because we felt the sellers would not be willing to adjust the sales price by the $40,000+ difference.
Strike two …. the second appraisal did not meet value either. But this time the appraised value was within 0.9% of the agreed upon sales price. Both the buyers and I believed that if the sellers really wanted to sell their Spring Texas home they would not take the risk of us terminating the contract. The sellers agreed to adjust the sales price to the appraised value and we moved forward with the transaction.
During my first five years in real estate I did not have a single low appraisal. All of my properties had “met value”. In the last four months, I have had two appraisals come in low. Low appraisals cause all parties with the exception of the appraiser additional stress. Thankfully both of my low appraisal scenarios have worked out because my buyers wanted the homes. They just didn’t want to nor were they going to overpay. Low appraisal or not.