What happens When Appraisals Come In Low?
What Happens When Appraisals Come In Low?
In a seller’s market like we have right now, buyers are competing for homes and driving up sale prices. That’s great for a seller, until the appraisal. Occasionally in an inflating market, the recent comparable sale values are not there to support the contract price of a property. Additionally, it seems appraisers are being a bit more conservative, given the unknown future impact of COVID-19 on our economy.
Recently, we have seen several appraisals come in low. On occasion we are able to debate an appraiser and show better comps, or point out an error in the appraisers data to get the appraisal changed. In other cases, the appraiser will stand their ground and stick to the valuation that they provided.
If there is no appraisal contingency and a buyer with strong financing, it’s not a problem. If there is an appraisal contingency or a buyer with weak financing, the seller may be forced into lowering the sale price to appraised value to make the deal work. Or the seller may decide to let the sale fall apart in hopes that the next buyer and appraiser can make the sale happen. Most often the buyer and the seller will negotiate to some agreeable middle ground to get the deal come together.
If the buyer is agreeing to a lower than sale price appraisal they must be capable of making it work with their financing. Lenders will only lend on the basis of appraised value. This means that if the appraised value is lower than the purchase price, the lender views the deal as having a larger loan to value ratio (equivalent to a smaller down payment). For example, if the sale price is $400,000 and the buyer was putting 20% down ($80,000), this would result in an 80% loan to value (LTV) ratio. 80% or better (lower) usually gets the best conventional financing terms. However, if the appraisal came in and $390,000 instead of $400,000, now this results in a 82% LTV ratio. In other words, the buyer would need to come up with a larger down payment ($8,000 more in this example) to hit that 80% LTV threshold. A higher LTV could negatively affect other loan expenses, such as private mortgage insurance, which would increase the cost of the buyer’s mortgage payments.
The bottom line is, if the appraisal comes in low, usually a deal can still be worked out. It might cost the buyer a few more dollars, or the seller might profit a little bit less from the sale, but occasionally it is a deal breaker. This is where it’s best to have competent and experienced professionals to help problem solve and work through it.