The Low Appraisal
Welcome back to my series, Demystifying the Real Estate Offer. How is this series still going? Because man there are a lot of things that can go wrong!
Today we are talking about the appraisal. If you are purchasing with cash, congratulations, skip this video, you won’t have an appraisal on your purchase. If you are getting a mortgage, tune in folks. When you get a mortgage on a house, the bank orders an appraisal. They will charge you about $400-500 for this which is either due when you order it or at closing.
The appraiser will meet the listing agent or get access to the house. They tour the house, check number of beds and baths, see the renovation level of the house and any improvements that have been done, and confirm the sqft of the house by measuring the exterior dimensions of the home. They will then produce an appraisal report with a value of the house. This amount is what the bank will loan you.
Explosion #1 – You offered more than the appraised value.
You offered $500,000 on a house that just appraised for $480,000. Now what?
Step 1 – Review the appraisal report with your agent and lender. If there are errors in it, you can send it back and challenge the appraisal.
Let’s say there is nothing wrong with the appraisal — If you have an appraisal contingency in your contract, then you have the ability to negotiate the sale price with the seller again. This might lead to a number of situations — You can ask them to come down to $480,000/the appraised value, meet in the middle at $490,000, or they can tell you to stuff it/you agreed to $500,000 and they want you to bring the extra $20,000 to the table.
Explosion #2 – The seller told you to stuff it and you don’t have the cash.
If the seller told you to stuff it, then you have two options – void the contract or come up with the extra $20,000 in cash. Now if you have this money in the bank, great, you can save the deal and buy the house.
If you don’t, see if your lender can give you a mortgage with a lower downpayment so that some of your downpayment funds can go to this new cost. This will mean your monthly mortgage payment goes up.
If you have a conventional loan, you are not in default if financing falls apart because of a low appraisal. If you have an FHA loan, you have a built in appraisal contingency that allows you to negotiate.
In competitive offer situations in this area, a lot of buyers waive their appraisal contingency so that they can win. If you have the cash to make up any difference between appraised value and sales price, then you are in a strong position. In hot markets, the appraised values can lag behind the market value of a house. It is just one of the realities of trying to get a home that a lot of other buyers would like to purchase as well.
This is a quick introduction to the appraisal, but I hope you found it helpful. In my next video, the financing is going to fall apart! Please subscribe to my channel if you haven’t already so that you are notified when it is posted!