What To Do When Property Does Not Appraise High Enough
For beginner real estate investors, encountering a property appraisal that comes in lower than the agreed-upon purchase price can be a significant hurdle. This often happens when the market value determined by a professional appraiser is less than what you and the seller negotiated. While this can feel like a setback, there are several strategic steps you can take to navigate this situation.
Understanding the Appraisal
First and foremost, it’s crucial to understand why the appraisal came in low. The appraiser considers several factors, including recent comparable sales (comps) in the area, the property’s condition, features, and location. According to the National Association of Realtors (NAR), appraisals are designed to protect lenders from over-lending on a property, ensuring the loan amount does not exceed the property’s actual market value. A low appraisal doesn’t necessarily mean the property is a “bad” investment; it simply indicates that the appraiser’s valuation doesn’t align with the purchase price.
Your Options When an Appraisal Comes in Low
- Renegotiate with the Seller: This is often the first course of action. If the appraisal is, for example, $10,000 lower than your agreed-upon price, you can ask the seller to reduce the price to match the appraisal. Sellers may be amenable to this, especially if they are motivated to sell quickly or if finding another buyer willing to pay the higher price will be challenging. Data from Fannie Mae indicates that 10-15% of appraisals come in below the contract price, creating opportunities for buyers to renegotiate.
- Pay the Difference in Cash: If you are eager to proceed with the purchase and believe the property’s long-term value justifies the original price, you can choose to cover the difference between the appraisal and the contract price out of your own pocket. This means your down payment will effectively increase to make up the shortfall. For instance, if the purchase price is $200,000, the appraisal is $190,000, and your loan is based on the appraised value, you would need to bring an additional $10,000 to closing, on top of your down payment.
- Challenge the Appraisal: While not always successful, you can request a reconsideration of value from the lender. To do this, you’ll need to provide compelling evidence that supports a higher valuation. This might include recent comparable sales that the appraiser missed, significant upgrades made to the property that weren’t adequately accounted for, or errors in the appraisal report itself. You’ll need to work closely with your real estate agent to gather this information. Be prepared with solid data; simply disagreeing with the number isn’t enough.
- Get a Second Appraisal (Less Common): Some lenders may allow a second appraisal, especially if the initial appraisal had significant gaps or errors. However, this is less common and often at the buyer’s expense. It’s usually pursued when the discrepancy is substantial and you have strong reasons to believe the first appraisal was flawed.
- Walk Away from the Deal: Most purchase agreements include an appraisal contingency. This clause protects you as the buyer, allowing you to withdraw from the contract without penalty if the property does not appraise for the agreed-upon price. This is a crucial protection for beginner investors, as it prevents you from being locked into an unfavorable deal. According to a study by the National Association of Home Builders (NAHB), appraisal contingencies are present in over 70% of residential real estate contracts.
Data and Perspective for Beginner Investors
It’s important to remember that a low appraisal isn’t an uncommon occurrence. As mentioned, a significant percentage of appraisals come in below the contract price. This is part of the normal real estate transaction process. For a beginner investor, this situation provides a valuable learning opportunity about due diligence and negotiation. It forces you to re-evaluate the deal’s viability and your risk tolerance. Always have an emergency fund available for unexpected costs, and ensure your purchase agreement includes an appraisal contingency to protect your interests.
Frequently Asked Questions (FAQs)
Q1: What is an appraisal contingency?
A1: An appraisal contingency is a clause in a real estate contract that allows the buyer to back out of the deal without penalty if the property’s appraised value is less than the agreed-upon purchase price.
Q2: Who pays for the appraisal?
A2: Typically, the buyer pays for the appraisal as part of their closing costs.
Q3: Can the seller lower the price but keep the difference for themselves?
A3: No, if the seller agrees to lower the price to match the appraisal, the new price becomes the official contract price, and the loan amount will be based on that lower figure.
Q4: How long does it take to get an appraisal?
A4: Appraisal timelines can vary, but generally, it takes 1-2 weeks from the time the appraiser is ordered until the report is delivered.
Q5: What if I didn’t include an appraisal contingency in my offer?
A5: If you waived your appraisal contingency, you are legally obligated to purchase the property at the agreed-upon price, even if the appraisal comes in low. This means you would need to cover the difference in cash.
Q6: Can a low appraisal affect my loan terms?
A6: Yes, a low appraisal can affect your loan. Lenders base their loan-to-value (LTV) ratio on the lesser of the purchase price or the appraised value. If the appraisal is lower, your loan amount will be reduced, requiring you to bring more cash to closing.
Q7: Is challenging an appraisal common?
A7: While possible, challenging an appraisal is not extremely common and requires strong, data-backed evidence to be successful. It’s more effective when there are clear errors or missed comparable sales.
Bottom Line
A low property appraisal is a common event in real estate transactions and not necessarily a deal-breaker. By understanding your options and leveraging the protections within your purchase agreement, you can navigate this challenge effectively. For beginner investors, it’s a valuable lesson in due diligence, negotiation, and risk management.