By Deborah A. Ten Brink
Part 3 of 3
First, let’s review what we’ve covered so far. In the first part of this 3 part post, we learned about what an appraisal is and why it is important to the transaction when purchasing or selling a home. In the second post, we learned that low appraisals can occur in any market and some of the main reasons why they happen. In this final post, I will cover some of the ways you can resolve the low appraisal situation and assist the transaction so it closes.
If this is happening to you, this may not give you much comfort but 31 percent of NAR Members experienced contract failures in February 2012 (contract failures are typically caused by declined mortgages and failure to pass underwriting guidelines from appraisals coming in well below the negotiated sales price). So, you are not alone in this type of situation.
I have recently seen where many buyers rely upon popular online valuation tools (such as Zillow, Movoto, and Trulia) instead of using the services of a local real estate professional to do a CMA (Comparable Market Analysis). I always tell buyers that these tools and the data they provide can be useful tools but should not be solely relied upon when deciding to make an offer on a property. These sites use algorithms (a step-by-step mathematical process to solve for available local price data) but are not based on actual inspections of the property or taking into account all of the foreclosures and short sale properties in a given neighborhood. Choose a particular property address and then look it up using 3 or more of these online sites and you will see how the results vary widely!
Remember, the Lender will be having the property appraised not to make sure you pay a better price but to make sure they can liquidate (sell quickly) should you default. Is this really something you should just guess at? As I’ve stated previously, we are seeing multiple offers, especially in the under $100,000 market. For all involved, you need to be an informed buyer and seller so the transaction closes and everyone wins.
Tips To Get To Closing Despite A Low Appraisal:
1) Ask The Seller If They Are Willing To Lower The Sales Price.
Another reason to know a realistic number when making an offer! If the home was overpriced or the value was inflated, (this can happen on For-Sale-By-Owner Properties or where the Seller does not listen to their Listing Agent’s advice) this solution seems to be the most logical. This takes a Seller that’s motivated and wants to close the deal. The Buyer will be pleased and the Lender satisfied. The Seller has no guarantee that if the Buyer in this situation walks away that the same thing may happen again should they receive another offer. The Seller may be wasting valuable time and lose even more money.
2) Ask the Seller If They Are Willing To “Hold” The Difference.
If the Buyer is all tapped out from down payment funds and closing costs and cannot make up the difference between the agreed-upon sales price and the Lender’s loan-to-value amount, both parties may come to an arrangement whereby the buyer makes payments or a lump-sum payment that can be made at a later time. After the closing, the Seller can then sell the second mortgage for a lump-sum to a note-buyer. This is actually how I got started in the discounted-mortgage industry many years ago. But, that’s a topic for another post!
3) Do You Believe The Appraiser Was Unfamiliar With The Area Or Made Mistakes?
When in doubt, order a second appraisal. Is the Buyer approved for a conventional loan? The Buyer and Seller have the right to demand in writing that a local appraiser be used. This type of loan is subject to the rules of the Home Valuation Code of Conduct (download pdf here).
Is the Buyer’s loan an FHA Loan? You can ask the Lender for a list of local approved appraisers. Either the Buyer or the Seller can pay for the second appraisal. It might come in higher and closer than the first one.
4) Provide Local Comparables And Fight The Appraisals
Even though appraiser are regulated licensed professionals, they are also human beings that can make mistakes or have a poor attitude about their work. Lenders will look at factual well-documented data. After all, they won’t make any money if the deal falls apart!
Hopefully you are being represented by a local real estate professional; ask them to put together a list of recently sold comparable properties that justify the agreed-upon sales price. Then have them submit the findings to the Lender’s underwriter and ask for a review of the appraisal. Have any real estate agents involved in the transaction call the Lender and complain if the appraisal is not accurate according to the comparable findings.
5) As A Last Resort: Cancel The Transaction
If the appraisal comes in too low and the Buyer cannot come up with a way to make up the deficit, the Buyer may have the right to cancel the transaction because they do not qualify for the financing. To protect the Buyer, the purchase contract should contain a clause called the “finance contingency” clause, which provides that in the event the Buyer does not obtain a written loan commitment from a Lender within a certain time period, the purchaser or the Seller has the right to cancel the contract with a refund of the down payment (escrow deposit).
Do you know of any other legitimate ways to deal with a low appraisal and still save the deal? If so, add your experience in a comment!