After much searching, you found what you hope will become your new home sweet home. But after you made an offer, the appraisal came back – and it’s less than what you offered. Many soon-to-be homeowners have no idea what to do when this happens, but don’t panic!
Roughly 8% of home appraisal values come in below asking price due to (1) market conditions at the time you make an offer, and/or (2) possible oversights by the appraiser who performs the appraisal. If the appraisal on the home you’re hoping to buy came in lower than what you offered, read on — you do have options!
When the real estate market is hot, there are plenty of buyers and not so many sellers. This leaves sellers with the best bargaining chips. In a ‘seller’s market’ like this, some sellers may overvalue their homes and inflate the asking price above what the home is worth. The same outcome can occur if the particular area in which the home is located is in high demand and there’s a shortage of available inventory.
Home valuations are handled by licensed, third-party appraisers. These folks make a determination of a home’s value based on multiple factors, including comparable sales. Appraisals are subjective and may be based on incomplete or inaccurate information (appraisers are, after all, only human).
A lot of competition and a favorable market for sellers means it’s very likely the seller won’t budge on their asking price, no matter how the appraisal shakes out. But it never hurts to ask.
If there isn’t much competition or the seller feels strongly that you’re the right buyer for them, you may be able to strike a deal. Even if the market is hot and buying competition abounds, it may be worth it to at least try negotiating on the price before considering other options.
There’s an old adage in real estate: A home is worth what a buyer is willing to pay for it, not what an appraiser says it’s worth. If your heart is set on a particular home and the only thing standing in your way is the low appraisal, you can consider paying the difference. For instance, some buyers take out the loan their lender has offered them, and then pay the rest in cash to the seller.
To avoid losing the home of your dreams in today’s competitive bidding wars, you can also consider adding an appraisal gap coverage clause in your offer. This means you agree to cover a certain amount of the difference between the offer price and the appraised value if there’s a gap. If the appraised value ends up being equivalent to the listing price, you don’t have to pay any extra money. But if the appraised value is under, be prepared to pay more.
Before offering to pay more, though, just make sure you’re completely confident the home has the potential you think it does, even if its valuation isn’t showing it right now.
If you think the appraiser has made an error, you can challenge the appraisal and ask for a new one. But you’ll need to make sure you have hard data to back up your appeal, or your hopes of a successful outcome will be dashed before they begin.
Even though it may not work for everyone, you can try to change lenders in this situation. With another lender and new appraiser, there’s a chance that the combination of the two could put you in a different position. However, this is certainly not a silver bullet and should only be considered if you have a good credit score and financial history.
As a last resort, you may have the option to shut the door on the idea of owning this particular home. Usually, your obligation to purchase the home is based on the home appraising for the purchase price.
A low appraisal after you’ve already made an offer on a new home is no one’s idea of a good time. But this seemingly unlucky scenario can actually help you see the deal in a new light. No matter how you choose to move forward, you’ll have more insight into the true value of the home and can make a more informed decision about whether it’s really the one for you.