As the housing market continues to recover, low inventory and high buyer demand have resulted in major price increases in the Twin Cities housing market. Happily, seller are getting top dollar for their homes. But while buyers are ready and willing to pay higher prices for homes, and multiple offers drive prices even higher, appraisers have to rely on past sales for their valuations, often resulting in low appraisals.
A low appraisal happens when the home value on the lenders appraisal comes in lower than the sales price agreed to by the buyer and seller. This impacts the loan to value ratio of the buyers loan, and if the ratios are too high, can prevent the buyer from purchasing the home. Many purchase agreements will give the buyer the option of canceling the contract if the appraisal comes in low. Important note – an FHA and VA appraisal will stay with the house for six months, even if the sales contract is cancelled.
A low appraisal does not need to kill the deal. There are several options that can keep the home purchase moving forward:
Dispute the appraisal. The real estate agents from either side of the transaction can work with the lender to dispute the appraisal by providing comparable sales that support the sales price that the appraiser may have missed, or that have recently closed. This can be difficult. We recently had a VA appraisal that came in 10% low, and used comparable sales that were all foreclosures, while the subject property was a traditional sale. We worked directly with the VA to show them what we felt were true comparable sales. Ultimately, the VA rejected our dispute, the transaction was cancelled, we sold it again a week later and the next appraisal had a value 2.5% OVER the sales price. The two appraisals, 30 days apart, had a $25,000 difference in value. The sellers ended up netting more on the 2nd sale, so it turned out to the sellers benefit.
Buyer brings more cash to closing. The buyer has the option of making up the difference by bringing additional cash to closing so that their loan to value ratios are not impacted.
Seller lowers the sales price. The seller has the option of lowering the sales price to the appraised price. This can be painful to the seller, but can be the quickest option for keeping the sale on track, especially if the buyer is unable to come up with additional funds to bring to closing and the seller wants the deal done. This will depend on the financial situation of the seller and if they are willing to wait for another offer to come along.
Buyer and seller negotiate the difference. In most situations, we have seen the buyer and seller meet somewhere in the middle, with the buyer willing to bring some extra funds to closing, and the seller willing to decrease the sales price.
Buyer and seller cancel the transaction. Nobody likes this option, but in cases where the difference in value is too large to bridge, it may be the only resolution. Seller needs to be aware how the existing appraisal will affect their home value going forward, as FHA and VA appraisal values stick with the house for six months.
We make sure we educate our sellers up front how important it is to price their home correctly, and what can happen if the home sells above list price (common due to multiple offers), so that they are ready to respond to a low appraisal. In most cases, we have been able to negotiate an acceptable solution for the buyer and seller, allowing the sale to successfully close.
Questions? Contact Myra Jensen at 763-227-0618