Real Estate: Low Appraisal?

By Jess Barron, Lindsey’s Inc. Realtors

One of the most common questions I receive is what happens if we have a low appraisal.

Most real estate contracts are contingent upon the property appraising for the sales price. The appraisal is ordered by the lender, but typically paid for by the buyer unless negotiated otherwise. A low appraisal can be common in a hot market where home values are rising faster than the comparable sales can keep up. The good news is that a low appraisal does not mean the deal is over. In fact, we are able to work out most low appraisals.

One option you have is to appeal the appraisal. This is when you need to lean on your Realtor to find suitable comparable sales that will support your contract price. Appraisers can make mistakes and overlook sales. Make sure you or your Realtor look at off-market sales and not just transactions on the local MLS. Once you have some transactions that you think will support the value, the buyer’s lender will send these to the appraiser to see if they warrant an adjustment. Unfortunately, appraisal challenges typically do not have a high success rate.

Another option is to order a second appraisal. This second appraisal will still need to be approved by the buyer’s lender. All parties must agree to the use of a second appraisal. The cost can be anywhere for a few hundred dollars to well above $1,000 depending on the type of appraisal.

A third option, and usually the most successful, is to negotiate with the seller. Typically, a seller will negotiate on a low appraisal. Keep in mind if the seller is paying your closing costs, per the sales contract, they may ask you to a pay a portion or all of your closing costs in return for a price reduction on the low appraisal. A good listing agent will know to ask for this.

Accepting a low appraisal can be in the best interest of a seller to avoid the risk of not finding another buyer, going through another negotiation, home inspection, appraisal, etc. In fact, with FHA and VA loans, the low appraisal will actually stay with the house for six months so a seller will be even more motivated to work the negotiation out. The seller could however terminate and wait on a buyer with a conventional or different type of loan. The option of negotiating with the seller is often successful because most sellers realize that an appraiser will likely be using the same comparable sales for any appraisal.

As a buyer, you could always terminate the deal and find another home. This is common when the difference between the sales price and the appraisal value is very large. This is where your Realtor can play a valuable role for you. It is important to have an appraisal contingency written in your contract, to protect you from a low appraisal. This will also allow you to receive your earnest money back and exit the deal without penalty.

A low appraisal does not mean the deal is over. In fact, they usually work out and to the buyer’s favor. A good Realtor is key in placing language and contingencies in the contract to protect you from a low value. Realtors can also assist you in negotiating with the seller and listing agent to work the deal out for everyone.

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Jess Barron is an Associate Broker with Lindsey’s Inc. Realtors and former President of the Newnan-Coweta Board of Realtors.