When Your Appraisal Value Comes In Lower Than The Purchase Price

As a buyer or a seller, the appraisal is one of the key parts in the home sale transaction. If you’re the buyer, you have to get an appraisal to get a loan. As a home seller, one of the key stumbling blocks on the sale is having the home appraise for the selling price. What happens when the home does NOT appraise for at least the agreed upon sales price? Are there any options?

Let’s start with an explanation of the two different types of home values.

Appraisal Value: This is the value of a home as determined by an appraisal. It is based upon how your home compares to nearby, similar homes that have recently sold.

Sales Value: The sales value is what your home would sale for in the current market. It’s based upon factors such as the current housing market, inventory, interest rates, etc.

In a perfect world, these two values would be pretty much the same. However, it’s not uncommon to have significant variations in the two values. Here’s an example. As of the writing of this post (fall of 2013), most cities have seen super hot real estate markets. With low inventory, it’s common to have multiple offers with bids going way over the asking price. So, let’s say you’re lucky to get your offer accepted. Your offer was accepted because you bid $75,000 over asking. When you get the appraisal, don’t be surprised if the appraisal value is lower than your purchase price (sales value). In a very hot market, sales that are up to six months old (what appraisers use as comps) probably don’t reflect the current value of homes.

The best time to act to mitigate any issues with the appraisal is at the beginning of the process. I would recommend having either the listing or buying agent meet with the appraiser when they do their physical inspection. Here is the best chance to help the appraiser understand the local market where the home is located. The agents can provide the appraiser with their list of recent sales that are most comparable to the home being appraised. You will find that most appraisers are open to input from agents. There’s no guarantee that the appraiser will use those comps, but more than likely they will be used as a starting point and will be reviewed.

So what happens when the appraisal comes back and the value is lower than the sales price? The first thing that should be done is to have the real estate agents review the comps that were used. You’re looking for a few things:

1: That the comps used “closed” within the past 6 months (within the past 3 months would be better).
2: The comps used are similar in rooms (beds/baths), physical condition, and more importantly in size of living space.
3: The comps used were close in proximity to the house being appraised (within a 1/2 – 1 mile radius if possible).

The real estate agents involved should make sure that the best possible comps were used for the appraisal. As part of developing a price to list a home for, the listing agent did their own research on comps. The same research should have been done by the agent representing the buyer.

If you and your agents feel that there are better comps that were not used, then an appeal can be filed. Each lender, or appraisal management company, may have different processes. It usually involves submitting a list of comps you feel better reflect the value of the home, but were not used for some reason.

The unfortunate truth is that refuting a completed appraisal rarely results in a change in value. I’m not saying it never happens, but appraisers are reluctant to make changes. Also, lenders always have and always will be very conservative on values. It will have to be a glaring omission for an appraiser to exclude a comp used, or use a comp that was omitted.

A less popular alternative is for the buyer to bring in more cash to bridge the gap from the sales price to the appraisal value. Again, not very popular, and not all buyers are able or willing to do this. Another option is to renegotiate the sales price down to the appraisal amount. This is one of the reasons why sellers prefer to accept offers from all cash buyers (or offers with a significant down payment).

Although it may be a tough proposition, it is worth the effort to challenge an appraisal that comes in below the sales price.  The key is determining how good are the comps used in the appraisal, and if there better ones that should have been used.  Work with your agent, and follow the proper protocol as set out by the appraisal management company or lender.