Reader question: “We just made an offer to buy a house, and our lender then had the property appraised. They said the house appraised for less than the purchase price. What should we do? What options do we have?”
It’s a common scenario for home buyers: You find a house that meets all of your requirements. It’s in the right neighborhood. It has all of the right features. And it falls within your price range. So you make an offer to buy it. The seller accepts your offer. Now you can go back to your mortgage lender with a purchase agreement in hand. The lender will send a home appraiser to determine the current market value of the property.
Oh yes, it’s the dreaded home appraisal. And this one delivers bad news!
The home appraiser says the house is worth less than the amount you have agreed to pay. In other words, the house did not “meet appraisal.” What now? Most real estate agents agree that home buyers in this situation should do one of two things:
- First, the buyer should ask the seller to lower the sale price to meet the appraisal.
- If the seller refuses, the buyer should consider walking away from the deal.
Ask the Seller to Reduce the Price
The first thing you should do, as a home buyer, is put the ball back into the seller’s court. Give them a copy of the appraisal report, if you have one. Or just tell them the house appraised below the agreed-upon purchase price.
Explain that you are not willing to pay more for a house than it is worth in the current market. Or tell them your loan will not go through because of the low appraisal. Make an offer to pay the appraised value, but no more than that. This is the most common strategy used by buyers when a house appraises below the purchase price.
Requesting Another Appraisal
Another option is to request another appraisal from the lender. Some lenders are willing to do this, while others are not.
It may help your cause to provide comparable sales data the appraiser may have overlooked. For example, if the appraiser says the house is worth $300,000, but similar homes have sold in the $350,000 range recently, you could present these comparable sales to the mortgage company and request another appraisal. Typically, it’s the seller who does this. But sometimes it is in the buyer’s interest as well. So the buyer can also request that the home be appraised again.
The goal here is not to pay more for a house than it is worth. I would never advise that. Your goal, as a home buyer, is to facilitate the process so the deal goes through. At least, if you truly want the house. If you believe the home is worth the amount asked by the seller, you should convey this to the lender and back it up with data. Granted, they might not listen to you. But it’s worth trying.
When to Walk Away From the Deal
You need to ask yourself another important question as well. What if the home appraiser is right? Maybe the seller really is asking too much for the house. It’s a common scenario.
Some sellers base their asking prices on the amount they paid for the house, or the amount they need to pay off their mortgage. But those two numbers have nothing to do with the current market value of the property. That’s what the appraiser is out to determine. He wants to know how much the house is worth in the current real estate market.
This is where comparable sales research comes into play. You — or your real estate agent — should examine recent home sales in the area, with an eye out for properties that are similar to the one you want to buy. These “comps” are the key to determining the market value of a particular house.
- If the comps support the seller’s asking price, the home appraisal might be inaccurate.
- If the comps support the home appraiser’s valuation, the seller might be asking too much.
In most cases, it’s best to walk away from a deal where the homeowner is asking too much for a property.
Investors vs. ‘Regular’ Home Buyers
There are certain scenarios where it might make sense to pay a bit more than the appraised value. This is a common strategy among real estate investors in hot markets.
Consider the real estate market in Southern California, for example. Home prices are rising rapidly in that region, and investors know it. So it’s common for an investor to pay more than the appraised value for a house. In their view, it’s still a good investment because they can turn around and sell it for even more money a few years down the road.
Granted, most investors pay cash and don’t need the approval of a mortgage lender. Buyers who use mortgages are generally better off paying the current market value for a house, and no more.
The Home Appraisal Contingency
In closing, we should mention the home appraisal contingency. When you write up an offer to buy a house, the offer can be contingent (or dependent) upon certain events or conditions. For instance, your offer might be contingent upon a successful home inspection. This gives you a way to back out of the contract if the inspector finds serious defects you are unwilling to accept.
The same goes for the appraisal. It’s generally wise to include a contract contingency that allows you to back out, if the home appraises below the purchase price. After all, the last thing you want to do is pay more for a house than it is truly worth. That’s a good way to end up with negative equity.