Fridays with the Fiddle Fig: What to do if an appraisal is too low
This week's topic: What to do if an appraisal comes in too low
Although this doesn’t happen often we do encounter it at times. In fact I just got a call from an agent asking me about a property I sold in the summer because they were having trouble with an appraisal that came in low. So what perfect time then now to talk about this.
There is one important thing to know about this. The appraisal is what determines how much money the bank is going to loan you. Let me give an example. If you are buying an $100,000 house and you are putting 20% down then the bank is going to loan you $80,000 assuming the house appraises for $100,000. Now if the appraisal comes in at $95,000 then the bank would only be willing to loan $76,000. This is the situation we will get into today.
There are 4 potential outcomes if the appraisal comes in low.
- The seller agrees to lower the purchase price to the appraised value. From our example the purchase price would be lowered to $95,000 and the bank would give a loan for $76,000.
- The buyer agrees to make up the difference between the appraised value and the purchase price. For this the buyers downpayment would be increased to make up the difference. If the bank is only willing to loan $76,000 then the buyer would have to have a downpayment of $24,000 instead of $20,000.
- The buyer and the seller agree to split up the difference in some way. The buyer may increase their downpayment a little while the seller reduces the purchase price. Each side gives a little. There are millions of ways this could be chopped up. In this example the easiest would be for the seller to reduce the price to $98,000 and the buyer increases their downpayment to $22,000.
- The last outcome is the buyer and seller are not able to agree and the buyer walks away from the home.
These are the 4 typical outcomes we see if an appraisal comes in low. The ideal situation however is that there is no issue with the appraisal and everything moves forward at the original agreed on terms. We have a proven strategy we us to ensure our clients properties have the best chance of appraising for the value they are in escrow at.
Tune in next week and we will go over how we prepare to meet appraisers on our clients behalf.