What to do when your house does not appraise

Appraisals can be a deal breaker, especially when a red hot housing market is causing buyers to put in higher than usual offers. In this video I go over some tips to help protect and prepare you for a low appraisal as both a buyer and seller.

So imagine you are a home buyer and against the odds, a seller has accepted your offer on the perfect house. Now you’re already anticipating, moving into a new home. You’re packing your things. You’re super excited. And then a week before closing, you get an email from your lender saying the house did not appraise and not only did it not appraise, it appraised for $23,000 less than the purchase.

This scenario just happened to one of my clients last week, and it is becoming a growing trend in our ever increasingly crazy housing market. How’s it going? Everyone? I’m David Quinones, the Lakeland Realtor. In this video, we’re going to be talking about appraisals specifically what to do when the appraisal comes back low. We’re going to go over some of the steps you can take as a buyer, as well as the steps you should take as a seller to list your property with an appraisal in mind.

First off, let’s start with what an appraisal is. An appraisal is basically an evaluation of your property based on comparable sales. So what they’re going to do is they’re going to look at your home and they’re going to find houses that have sold near your property that are close in square footage, bedroom and bathroom count as well as amenities. The appraiser is generally going to look at three properties and use those to come up with an evaluation based on yours.

Now that we know what an appraisal is, let’s talk real quick about what an appraisal is not.  An appraisal does not take into account any kind of estimate you’re going to see on those third party websites like Zillow or Redfin; those are not appraisals. Also, they’re not going to take into account any active or pending listings. Just because there’s an active listing right down the street from you, an appraiser can not use that. They’re only going to go off of sold comparable properties.

Once an appraiser comes up with a price, one of two things is going to happen. One, it’s going to meet at or above the purchase price. In which that case, congratulations, you’re going to close or two, it can come in below purchase price. And this is where the problems occur.

When the appraisal comes back low, this will often affect your loan to value, which means that the bank’s not going to loan any higher than what the appraised value is; they don’t want to be financing a home with negative equity. So that gap falls between you and the seller to make up that difference. In many cases this gap could be a deal breaker. For my client in the example I was mentioned at the beginning of the video, luckily we were able to make up that $23,000 gap. She had some savings in reserves that she was willing to put forward to make up some of that difference, and the seller was also willing to lower the purchase price to be able to meet us in the middle. She was incredibly lucky because a lot of times, a low appraisal, especially that low can cancel a deal.

Let’s talk about some of the ways you can protect yourself as a buyer when you’re going to purchase a home that you think might not appraise. As a home buyer, one of the first things you can do is make sure you’re protected by an appraisal contingency. If you’re an FHA or VA buyer, those are already built into that adendum, but if you’re a conventional buyer and you have a feeling, the home might not appraise, it’s not a bad idea to include a separate appraisal contingency with the offer. I know what you’re thinking. You’re saying “David, I’ve got a financing contingency; I’m fine.” Check the print again. If you look at the Florida As Is contract, it states 30 days after effective date. That’s the already pre-filled portion for your financing contingency. What we’re seeing now is appraisals are taking up to four weeks to come in, which means that if you find out that your appraised value is below the purchase price 28 or 29 days after the effective date, your financing contingency might be out the window, which means you’re not protected if you have to cancel the contract. You also could lose your deposit. So it’s not a bad idea to have a separate contingency specific that the house does meet appraise value.

The second thing you can do to prepare for a low appraisal is to have money in reserves. Having savings on hand in case of a low appraisal will allow you to make up that difference to close on the deal.

Now let’s talk about sellers. One of the first things you can do as a seller is try to contest the appraisal. It doesn’t mean you just disagree with the appraiser and say they did their job wrong, but you can present new data. What would that be? It would be a comp that the appraiser did not use. Or maybe a comp that just recently sold that you would like them to take into consideration. You can present that to the appraiser, but it doesn’t mean they’re going to necessarily use it. Remember the appraiser is hired by the buyer’s lender, not by you. So just because you found the perfect comp or you’re using a comp right down the road, it’s really up to the appraisal’s judgement if they’re going to put that into their report.

One of the other things you can do as a seller is to list the property with an appraisal in mind. So when you’re trying to come up with a valuation, it’s a great start to look at sold properties. Remember I mentioned earlier, appraisals don’t take into account active or pending listings, so go with your realtor and look through the MLS to see what has sold in your neighborhood. Use that as a base price to list.

The final thing as a seller to consider, as these offers start rolling in and we’re seeing offers going 10, 20, 30, $40,000 above purchase price-keep the appraisal in mind. Just because the price is higher, doesn’t mean your home’s going to magically appraise for higher. Sometimes the highest offer might not be the best offer.

Those are some examples that a buyer and a seller can take to both be prepared and protected in case there is a low appraisal. As the market continues to heat up, we’re going to keep seeing comps go higher and higher. Appraisers are really there to keep these values in check.  Just because someone’s willing to pay so much more for a property, doesn’t mean that’s the actual value of the property. So again, keep that in mind, both as a buyer and as a seller.

Now, if you have any questions on appraisals selling, buying, all you have to do is contact me as a realtor. I’m here to educate and protect you through the entire transaction. And I would love to help. I’m going to put my number in the description below you can call or text me anytime. Reach out and we can get started today.