There’s no doubt that one of the most frustrating aspects of real estate is dealing with a low appraisal. And while the discrepancy between what a home is valued at and what the sellers are asking may be vast, that doesn’t always mean it’s time to throw in the towel.
Being prepared for a low appraisal is probably your best line of defense. This less-than-optimal situation doesn’t mean your deal is dead. Know that with certain adjustments it could still move forward.
“Buyers need to know the risks and requirements, whether that be providing a larger down payment, acquiring a second mortgage, or finding an alternate lender,” says Rob Golfi, a realtor with Remax Escarpment Realty Inc. “It’s critical all buyers understand the ramifications of financing a property, including the potential problems.”
Before you make your next move, though, it’s wise to go over the appraisal document with a fine-tooth comb. Scrutinize the appraisal for possible errors. Did the appraiser leave out a bathroom? Believe it or not, it can happen. Did the appraiser neglect to include a valuation for granite counter tops? Though such mistakes are uncommon, make sure your appraisal does not fall victim to a big oversight.
Once you’ve done that, analyze what home comparisons the appraiser used. How similar are they to your house? And how recent are the sales? Was the appraiser well-versed with the neighbourhood or an outsider? Sometimes appraisers are unfamiliar with the markets they’re asked to evaluate.
There are many reasons that an appraisal comes in low. An inexperienced appraiser is one but so is the valuation the seller and the realtor place on the property. A lack of comparable sales in the vicinity of the house in question could also be the cause as could inflated prices due to a hot real estate market in which bidding wars are the norm. Of course, the opposite also applies where home values are dropping in your market thanks to an abundance of properties for sale.
Remember all is not lost with a low appraisal. Keep your chin up and consider the following:
A low appraisal is a good opportunity to trying lowering the price of the home: Let’s face it, a traditional lending institution is not going to lend a buyer more than the home is worth so it might be worth a try to see if the seller can be persuaded to lower their price.
Take a second look at what’s included: Often, pending sales have appliances and other items included. Consider renegotiating to reduce the price by using some of these items as leverage.
Fork over the difference: If the buyer really wants the house, consider paying the difference between what the offer is and what the bank will lend.
Challenge the Appraisal: As mentioned, some appraisals have errors. Comparables outside of the neighbourhood can show lower values than the home in question. Time factors may also be an issue. Did the appraiser use homes that sold six months ago and not include current pending sales that reflect recent market trends?
Order A Second Appraisal: Ask your lender for a list of approved appraisers. Each lender has their own list of appraisers they will accept.
The Seller Can Help Out: If the buyer really wants the home, but can’t come up with the difference in cash, the seller can offer to carry a second mortgage on the amount of the difference required to close the sale.
Making payments or a lump sum payment at a later date to the seller is another option. Always have a lawyer or notary view this type of arrangement to eliminate any confusion or errors in this type of contract.
The Buyer Can Cancel the Sale: Assuming the appraisal is accurate, that indicates the home may have an inflated price tag. The lender will not lend more than the home is worth and the buyer does not have excess funds to pay the difference.
Are there times when it’s best to just walk away? Sure. Perhaps the appraiser did you a favour. And while it may not seem like it at the time, you may come to appreciate not having bought a house for more than it is worth.
Rob Golfi of The Golfi Team is a Sales Representative with Remax Escarpment Realty Inc, your real estate expert servicing the Hamilton, Stoney Creek, Grimsby and surrounding areas. You can contact Rob at email@example.com