What Do You Do As A Home Seller When The Appraisal Comes in Less Than The Purchase Price You Accepted?
You receive double-digit multiple offers, and to your surprise, the purchase prices in those offers exceed way more than you initially thought your house is worth. You picked one of the offers and popped a bottle of wine to celebrate successful sale with extra dollars you did not expect.
Now, you are waiting buyers close the escrow, packing up and planning moving out to your new home. Buyers completed the inspection and as a result requested several repairs. Then, your agent calls and tells you that the appraisal comes in lower than the purchase price offered. Immediately, you receive an addendum says "Purchase price to be $..............." to remove the appraisal contingency to move forward.
Unfortunately, It is a different feeling than the day you accepted the offer, not a one that triggers a celebration. The deal might be falling apart. What will you do now? Before getting into the advice, I like to share my recent experience relating to the topic.
A Tale of Two Identical Homes in Oakland Hills
I represented a buyer recently on an Oakland Hills property, a beautiful Eichler and successfully won the bid where there were multiple offers by $200,000 over listing price.
Buyers had the appraisal, loan and inspection contingencies in the accepted purchase contract. Upon completion of the physical inspection, we requested $15,000 credit toward the closing costs and repairs which is accepted.
A couple of days later, the appraisal came in $25,000 lower than our original offer at $1,100,000. We requested the purchase price to be $1,075,000. The seller accepted our request again.
Meantime an identical house with the similar condition and floor plan came on the market just five homes next to ours at the same listing price. The seller of that home received and closed the escrow at $1,275,000 which is $200,000 higher than what my buyers purchased just weeks earlier.
I firmly believe the appraisal on that house came in or around our purchase price because no other property would support the value within the time frame. Since it was closed, Buyers must have made up the difference or it was an all cash offer.
I am very happy with the results since I have a very happy buyer. As a Listing agent, my approach would have been different for sure.
Let's dive into the details now and first understand what an appraisal is? It is an independent, unbiased opinion of the value of the home ordered by the buyers' lender if financing is involved.
The appraiser looks at the recent sales within acceptable proximity and compares them to your home considering features, amenities, and condition. He will also take into consideration of overall market conditions such as healthy, declining, stable, or be improving. If your buyer is financing the house through an FHA or VA loan, the appraiser will be more stringent when considering the condition of the property.
What can you do to avoid these problems:
First and foremost you should have taken an offer as-is with no contingencies if market demands for it.
Don’t select the buyer who presents the highest offer without considering the terms of the offer. Pay attention to the contingencies and negotiate with top three homebuyers on both price and terms.
If you get an offer without any contingency, that would be ideal, and it often happens in today's market.
If the buyer who made the highest offer does not agree to cover the difference between the purchase offer price and appraisal report value, you might want to negotiate an offer on the second or third highest one. You also need to verify your buyer's ability to fund the difference because they are paying the difference in addition to their down payment.
Be present when the appraiser visits your house to inspect.
You know your home better than anyone. You know what improvement you made, what the condition was before, and how much you spent on improvements. You might even know about future construction projects, zoning changes, the possibility of a large company moving into offices that will be constructed nearby, therefore, additional employment and such. These types of information might affect the value and appraiser, and your agent may not be aware of them.
You should never try to pressure, intimidate the appraiser or make threats if the evaluation doesn’t come at purchase price offered. If don’t want to or not able to be present, you need to make sure your listing agent is thoroughly aware of all of the improvements, repairs, alterations and or revisions made to the property, particularly those that aren’t visible during the walk through.
Provide the appraiser with equivalent sold houses
Make sure that your agent presents the appraiser with relevant like sold homes. Your agent may know a pending comparable home sale. You can search sources other than MLS for similar properties, such as public records, sold by owner homes and new construction. Ideally, they have to be within six months or less.
Give a list of improvements and upgrades to the appraiser
Having a list of improvements clearly, makes it easy for appraiser while working on the report. You may also accompany each improvement with a photograph, before and after if you have them.
Correct public records errors
Check your public records at the city offices for accuracy. Provide any corrections that are not reflected in the public records. Give any documentation verifying any correction including architectural prints or previous appraisal.
Present the appraiser all of the offers you received.
Buyers' willingness to pay the high price demonstrates the market demand which is an indication where prices will be going in that particular neighborhood. However, If the other offers are significantly less than the one you picked, DO NOT provide the offers.
What if my house appraises for less than the amount in the ratified contract with the buyer?
If the property appraises lower than what you had agreed to with the buyer, you can ask an appeal. If that is the case, buyers' lender orders to start the process. Appraisal Management company manages the appeal process. It will also be helpful if you have a written rebuttal with proper documentation to challenge the appraiser's opinion of the value. Your goal is to show appraiser why it is worth more. Document the fact and figures in a logical and tactful manner. Refrain from emotions and descriptions like "light and bright," open floor plan" in your argument. There is no value in such descriptors other than emotional. Provide market report specific to your zip code or neighborhood that demonstrates a trend for higher prices. Correct obvious errors such as square footage. Use alternative comparables.
What if rebuttal does not work?
Human nature dictates that people usually do not admit their mistakes or quickly change their minds and appraisers are no different. Appraisers are independent of the lender since Dodd-Frank legislation. The lender may order a second appraisal, or your buyer may go to another lender if they still want to work it out. I have seen many times a different appraisal from another lender's Appraisal Management Vendors or different appraiser. If the buyer is financing by using an FHA or VA loan, appraiser stays with the property, and it is harder to over come the challenge.
Experienced and knowledgable Real Estate Agent would help you navigate challenges like this.