Out in the field with our buyers, we’ve been seeing multiple-offer situations on a number of homes, driving up the home price beyond what a reasonable comparable market analysis (CMA) would support. This is to be expected in a market like ours with tight inventory and high demand. Unfortunately, this also means that a number of buyers who rely on a mortgage for their home purchase may run into what we call, an appraisal deficiency issue. In this article, we explain how your lenders use the appraisal to determine your loan amount, and what you can do to both avoid and prevail in the occurrence of an appraisal deficiency issue.
For those who do not know, an appraisal is a professional estimate of the value of a property. Appraisers have various techniques at their disposal to determine this value, but in general their estimate will be based on recent sales in the surrounding area, as well as the condition of the property being appraised. Other important factors that the appraiser takes into consideration include square footage, appearance, and amenities. As a buyer, you have the right to request a copy of the appraisal.
Lenders will require an appraisal to ensure that their investment is safe. If a buyer purchases a property above its true market value, and then later defaults on his or her mortgage, the lender is stuck with a property that may not cover their losses. Therefore, once a lender receives an appraisal, they will use the lower of the Sales Price or the Appraised value when determining your loan amount. If the appraisal comes in under the sales price that you and the seller have agreed upon, we run into an appraisal deficiency issue.
How do you avoid this? In general, avoid making outlandish offers on a home, even if the sales-price falls within the loan amount you’ve been pre-approved for. While this advice may be hard to follow at times, it may save you a lot of time and heartache.
However in a market like this, appraisal deficiencies may turn out to be unavoidable for some buyers. So what are your options if your appraisal comes in low? Usually your contract will include a contingency that requires the property appraisal value to fall at or under the sales price. With this kind of contingency, you can always walk away from the deal. However, a majority of buyers want to make the deal work, so what are your options? Here is a list of both common and creative remedies:
- Negotiate with the seller and reduce the sales price. In a competitive market like this one, this may seem like a long shot, but don’t be discouraged. Chances are, if the seller has accepted your offer, your combination of price and terms are the most attractive that they’ve seen. Every buyer with a mortgage will likely run into the same issue. For these reasons, seller’s often want to make your deal work, so don’t be afraid to negotiate.
- Put more money down to cover the difference between the appraised value and the sales price. You can use your additional funds, or this may be a good time to ask friends or family members for help. A creative and novel way to go about this is through crowdfunding. To learn more about crowdfunding a downpayment, take a look at our blog post on the topic
- Dispute the appraisal, wisely. What do we mean by this? If you are going to dispute an appraisal, do so with data that supports your argument. This data will usually take the form of poor comparable properties used in the appraisal, or well-suited comparables that the appraiser missed. Your real estate agent can help you collect this kind of data.
Find additional tips to avoid a low appraisal here.