A Low Appraisal, Now What?

Everything was rolling (or maybe bumping) along on your way to settlement, and your appraisal has come in and it’s low.  So now what?

If you have read my post “What is an appraisal?”  then you know why banks order appraisals and that they will loan you only a percentage of the appraisal price or the sales price, whichever is lower.  An “LTV” (Loan to Value) is the ratio of the loan… it may be 100% if you’re doing a “no money down” loan, it maybe 96.5% if it’s an FHA loan, it may be 5 to 20% if it is a conventional loan, but every loan has a maximum LTV.

If you were planning on paying cash or getting a loan for less than the max LTV, then you may not have an appraisal and even if you do, this might not be as big of a deal.  But in most cases a low appraisal is a pretty big deal.

Let’s say you’re getting a conventional loan for a property, and putting down 20% to avoid the requirement for private mortgage insurance.  You were planning to pay $105K (the contract price) for the property, which required you to put $21K down.  The appraisal comes in at $100K.  Now what?

1. With an appraisal at $100K, you would then have to put down $25K (20% of the appraised value plus all of the difference between the sales price and appraised value).  The seller wants you to do this.
2. You can ask the seller to drop their price to $100K and then you only need to put down $20K. You want the seller to do this.
3. You can negotiate something in the middle…Maybe they drop their price to $102,500 and you pay $22,500 as a down payment.

Each party has their own restrictions and feelings and thoughts on this.  In the end, if you can not agree on a resolution then the you may very well not be able to purchase the home.  Try to remove as much emotion as possible and focus on problem solving.  Know that low appraisals are common in today’s market as is always the case when prices are on the rise.

From a technical stand point, you need to understand your contract and what it says about appraisals, and follow the procedure.  Most contracts do have an appraisal contingency  – at least most of the ones I write and review do.  If you do not have an appraisal contingency, then you can still *try* to negotiate something with the seller in the event of a low appraisal, but technically they’d have no obligation to lower their price or let you out of the contract without this.

Regardless, negotiating a resolution can take a few days, so I encourage patience here.  Most of the time these things can be worked out and usually it ends up being something like the resolution in item 3.  But maybe the parties can’t agree, and in those cases you must be ready, willing and able to emotionally detach from the home of your choice, hopefully finding something even better.  I have only had one contract completely fall apart because of a low appraisal, but in the marketplace it happens often.

A few other things worth mentioning here:

1. Appraisals are an educated opinion of value.  I strongly discourage you from assuming that an appraisal is what sets the value of property.  It’s not.  It’s one person’s opinion and it is subjective.  If you hire 5 appraisers to appraise the same property at the same time, and do not give them a sales contract to support, you will get 5 appraised values.  If they are within 5% of each other, then they are pretty accurate.  Some properties are harder to appraise than others, and can see much wider variances.
2. Appraisals are supposed to support the sales contract value. We give appraisers the sales contract and we want them to support that contract objectively, methodically and with factual information.  So most of the time, an appraisal should be at or very close to the sales contract price.
3. It’s hard to get an appraiser to change the appraisal.  To avoid accusation of fraud or coercion, appraisers very rarely will make changes to a completed appraisal , EVEN if there are factual errors.  However, getting a change is not impossible, so it may be worth the attempts.  How to do that is material for a later post.  In short, though, know it is easier to prevent a low appraisal than to cure one.
4. Because everyone is hypersensitive about being accused of fraud, you are not likely going to be able to get a new appraisal.  In the old days if an appraisal was low, you ordered another one and hopefully the new one supported your sales price and you moved on to closing.  Today I do not know of a lender that will allow this.  So if you think the appraisal is wrong, and you can’t get it changed, then you, Mr. Buyer, may have to change lenders to get a new appraisal.  This IS an option, but of course takes time.
5. FHA Appraisals ‘stick’ with the property for 6 months.  Usually.    The first thing many people don’t realize is that if you have an FHA appraisal and it is low, and that contract falls apart, and you get a new contract from a new buyer then they will have to use the FHA appraisal the prior buyer received (regardless of the lender they planned to use). This is usually true.  HOWEVER, there is a way around it.  If the first buyer is kind and also agrees that the appraisal was wrong, then they can ask their lender to release the appraisal with HUDs system.  ONLY the lender ordering the appraisal can do this, and most lenders don’t know they can do this so they will say they can’t.  Since the lender works for the buyer, and this move is in the interest of the seller, it’s rarely done.  But it can be done.  In point 4 above, where I mention that buyers can go to a new lender and start the process over, this would not apply if they were FHA buyers unless the appraisal was ‘released’.