How to Deal with a Low Appraisal - Solutions to Save the Contract

Don't panic if the appraisal is low

The contract on your home is signed and details are progressing nicely. The buyers felt it was safe to go ahead with inspections, and the results were acceptable. The closing date is on target. Everyone is waiting for the results of the home appraisal results so that a loan commitment letter can be issued. No one is too worried, because the house sold for an appropriate price, and appraisals have a magical way of coming in just where they need to be.

The Phone Call

Everyone gets a phone call. The home appraisal is $8,000 less than the sales price. Buyers, sellers, and agents all panic--is there anything you can do?

Keep Your Cool

One or both parties may have another contract that hinges on a successful completion of this one, and getting bad news can make everyone a basket case, especially when it's close to closing day.

It's easier to work through the problem if you stay calm, so keep your cool and develop a plan, because there are solutions to make the sale move forward.

Possible Options

Seller Reduces Price

Hold on, that's not the only solution, but it is a common one. Would the seller be willing to reduce the price of the home? If the buyers are seeking a mortgage, they can probably back out of the contract due to the financing contingency, since the low appraisal will affect the way the lender views the home. The seller may be willing to negotiate to save the sale.

• A cash buyer should have been protected with a contingency clause that states she can back out of the deal if the home doesn't appraise at or above the sales price.

Buyer Pays More Down

The buyer may want the home badly enough to make a larger down payment, but don't assume that will correct the problem. I've been involved in home sales where buyers were prepared to pay additional money down to make a deal work, but lenders would not approve the loans. They did not want to finance a property that the buyer went into with a negative equity, even if the buyer was willing to take the risk.

Seller and Buyer Negotiate

Seller and buyer come to an agreement, both giving a little.

Dispute the Appraisal

• Ask the lender for another appraisal. The lender may send out a new home appraiser or ask the original appraiser to reevaluate the property.
• Ask your agent to find out which houses were used as comparables. Does the agent agree they were good comps? Most appraisers haven't seen the comps up close and personal the way agents do. The home appraiser might have unknowingly used houses that needed a lot of work. If poor condition is verified, ask the appraiser to investigate the comparables to see if adjustments should have been made.

Does the Contract Include Personal Property?

Home appraisers only put a value on real property, the land and the improvements to the land. If the contract includes furniture and other types of personal property, it won't be a part of the appraisal. Buyers should pay for it separately.

Is the Seller Paying Funds to the Buyer at Closing?

This often works, but it can be killed by a low appraisal. Always talk with the lender about their policies and the proper wording for this type of agreement. Then be prepared to deal with it if the appraisal comes in low.

Bottom Line

If the house is truly overpriced, the sales price should come down. Sometimes it takes a low appraisal to convince a seller that his price is out of line.

Follow the links above right to read more advice about appraisals and other home buying topics.