What happens when an appraisal comes in low?
In a rapidly appreciating seller’s market like this one, it is very common for the appraisal to come in lower than the agreed-upon purchase price while we’re negotiating an offer. The appraiser’s job is to check the value of the home and make sure that the bank is protected in case of a mortgage default.
Keep in mind that a home is ultimately worth what a buyer is willing to pay for it. When we’re negotiating an offer price with these kinds of conditions, the buyer will often offer a price that is higher than what recent comparable sales have closed for. The appraiser can only use closed sales for their valuations, and in an increasing market like this, it can be hard for them to support a higher price.
What happens when an appraisal comes in below the agreed-upon price? The buyer could make up the difference in cash, or the seller could agree to lower the price. In today’s market, buyers have frequently been waiving the appraisal contingencies or offering to pay over the appraised value in cash to secure the home.
As a buyer in this kind of competitive environment, you’ll need to be in a position where you can do that. If you are planning to put 20% down and have the cash on hand, you might consider changing that to 15% or even 10% and have the rest of the cash as a buffer to fix a low appraisal. It will change your monthly payment very little.
This situation isn’t exactly new to Ali Adams, one of the buyer’s agents on our team. When she works with a buyer, she already knows that the seller and their agents are working on what to do in case of a low appraisal. Generally, her buyers will offer over asking price, and they know that the comparable properties are anywhere from 30 to 90 days behind the market. Therefore, she tries to figure out how much they can pay over the appraised value and put that in the offer. If they’re not in a position to waive the appraisal altogether (which some buyers aren’t), they can specify in an addendum that they’ll pay X amount over the appraised value without exceeding the contract price.
We’ve seen examples of this many times over the course of last year and this year, and Ali is winning homes for our buyers simply by applying this strategy. Just recently, she won a home for a buyer who was using an FHA loan with only 3.5% down and just $5,000 to offer over the appraisal. She ended up having her buyer shift the loan to 100% financing for Utah Housing so they could have more money to offer over the appraisal. The appraisal came in above what they were under contract for, so her buyer didn’t even need to use that money. Instead, they can put it toward upgrades and repairs.
If you’re looking for an extra advantage in this market, we have several agents just like Ali who would love to work with you. Just give us a call or send us an email and we’ll help you get into the home you want.