This regularly-scheduled sponsored Q&A column is written by Val Sotillo, Northern Virginia-based Realtor and Falls Church resident. Please submit your questions to her via email for response in future columns. Enjoy!
Question: We are under contract for a property in Falls Church and the home didn’t appraise for the purchase price. What are our options?
Answer: Don’t panic! Low appraisals are a common side effect of a seller’s market. Appraisals are largely based on comparable home sales that closed prior to the home you’re buying. When there is a limited number of units that have sold and the market is hot, appraisers might have a harder time coming up with a home value that keeps pace with a hot market.
But First, What’s An Appraisal Contingency?
A home appraisal is an impartial professional opinion of how much a home is worth. In a property sale transaction, an appraisal is used to let the lender know that the contracted sales price is supported.
An appraisal contingency protects buyers if the appraised value is less than the price they’ve agreed to pay for the property and gives them the right to renegotiate the sales price with the seller, or withdraw from the contract without a penalty if buyer and seller don’t come to an agreement.
Your mortgage lender cares about the appraisal only to the extent it affects the loan-to-value ratio. A low appraisal does not mean the lender won’t lend. It means the lender will make a loan based on the ratio agreed to in the contract at the appraised value.
When Is It Okay To Waive The Appraisal Contingency?
I don’t often recommend waiving the appraisal contingency, but in some unique situations it could be considered an option:
- Buyers competing with multiple offers might choose not to include an appraisal contingency in their contract to make their offer more attractive to the seller. Buyers must be financially prepared to cover any difference between the sales price and appraised value.
- For an all-cash buyer, an appraisal is not required but it’s entirely up to the buyer to have one.
Most Common Reasons For Low Appraisals
- The market is moving too quickly — In areas where homes are selling rapidly, with multiple offers and increasing prices, it may be difficult for the appraiser to keep up with them as the appraisal process compares recent past sales.
- Bad comps — Bank owned, foreclosures and distressed properties bring down the value of the subject property unless an appraiser adjusts for marketing conditions.
- Improvements are not always as valuable as you would expect — No matter how nice, the appraiser won’t value the improvements significantly higher than the same improvements in the other homes in the area.
- Lack of local market knowledge — The comps the appraiser uses may be in an area that is not as pleasant or desirable as where the subject home is, which can negatively impact the appraisal value.
- The property is priced incorrectly — A common saying in real estate is that a property is worth whatever someone is willing to pay for it. While some would argue that you should never pay more for a home than what it’s worth, it’s important to remember that appraisals are merely opinions of value. This is where your agent is especially helpful and he understands what the market is doing and can clarify your options so you can make the best decision for that moment.
A Low Appraisal Doesn’t Have To Be A Deal Breaker
A low appraisal is not the end of the world. Fortunately, you have options:
- Renegotiate sales price –– You can request the seller drop the price of the home to the appraised value. Here’s the kicker, if you don’t have an appraisal contingency you’re obligated to buy the home regardless.
- Make up for the difference — In some cases, the buyer will have enough cash on hand to cover the difference between the appraisal and the selling price at closing. As a buyer, if you feel confident that the value is there for you, you can simply add cash to the down payment. Or if both parties still want the sale to go through, they could split the difference, with the seller dropping the price a bit and the buyer adding cash to the down payment.
- Explore more financing options — If renegotiating the price is not an option and you don’t have cash to cover the difference, your lender should be able to help you with different financing scenarios. Many buyers put down 20 percent when they purchase a home, so there’s typically a cushion if the value comes in a little short. If this is the case, you can work with your lender to adjust the loan amount as needed.
- Dispute the appraisal — Your agent can offer you advice as to whether the appraiser used the most relevant and comparable sales, and if they feel a value dispute is warranted.
- Cancel the contract — If you decide that the house is not worth more than the appraised value and you have an appraisal contingency, you can withdraw from the contract and move on to another home.
I hope I’ve helped answer some of your appraisal questions.
If you’d like more information, or would like a question answered in my weekly column, please reach out to [email protected]. I hope to hear from you soon.
Val Sotillo is a licensed Realtor in Virginia, Washington D.C., and Maryland with Real Living At Home, 2420 Wilson Blvd #101 Arlington, VA 22201, 703-390-9460.