What?  The Appraisal came in less than the purchase price of the home?

This is certainly a scenario that happens and can be surprising to both the seller and the buyer.  You may ask yourself, is this good news or bad news for me as the buyer?  You may think, this is good, I can get the house cheaper, right?  Well that depends.  Let’s discuss a few different scenarios that can play out.

First of all, there are many factors to take into consideration for both the buyer and the seller when a home fails to appraise.  For example, most buyers do get mortgages when buying a new home.  Lenders will only loan money on a percentage of the purchase price or the appraisal, the lesser of the two.  So, if you are getting a 97% loan on a home that costs $200,000 but it only appraises at $180,000, the lender will only lend you 97% of the $180,000.  As a buyer, you have 4 choices for next steps and they are as follows:

  1. You can advise your agent to tell the listing agent that you will only agree to pay the appraised value of the home which in this case is $180,000.
  2. You can elect to pay the originally agreed upon purchase price which is $200,000 ($20,000 more than the appraised value).  In this particular scenario, since you are getting a 97% LTV loan, you will have to put down an additional $19,400.  This is in addition to your 3% down and closing costs.  If you decide on this option, you must have the additional money to put down and understand that it is likely that the seller overpriced the home.  If this is true, you will be upside-down in the home until the market goes up significantly.
  3. You can negotiate with the seller and meet at a price somewhere in between the original purchase price and the appraised value.  In this case, as above, you will come out of pocket with more money than you had originally planned and run the risk of being upside-down.
  4. You can challenge the appraisal and investigate whether the appraiser used the best comps.  For example, did the appraiser use a “fire sale” as a comp and the value was so low on the one home that it significantly affected the average prices of the other homes?  Did the appraiser use homes that were not the best comps or not use similar homes?

Usually, in most cases, the buyer will elect the first option which is to negotiate with the seller to pay the appraised value.  That is certainly what most buyer’s agents and master negotiators would recommend.  In most cases, the SELLER will elect to do the third option before doing any further negotiations.  It is very rare that an appraiser will change an appraisal.  Thus, if a challenged appraisal does not change the value, the seller typically will agree to the lower price.  However, the buyer should know that sometimes, the seller will not agree and draw a line in the sand and demand the sales price.  In the scenario above, it is highly unlikely that the buyer would agree to pay $200,000.  The reason being is that someone that is needing a 97% ltv loan is unlikely to have the additional $19,400 to put down.  If the seller demanded full price in this scenario, I can guarantee you that the buyer would walk away from the deal.  However, if the buyer is not needing a mortgage, and has the money to pay the additional monies, sometimes they may agree to a higher price.  What?  That’s right, if it is a sellers’ market and the price difference is not significant, some buyers may elect to pay the extra money.  It is rare but it does happen.  The buyers just “love” the home enough to pay the extra money and avoid having to start the search process again.  Or perhaps they need to be in the home by a certain date and decide to agree so that they have somewhere to live.  There are so many different scenarios.

At the end of the day, if you are purchasing a home and the appraisal comes in low, we recommend that you negotiate to get the lower price.  If the seller will not agree to the lower price, you should consider walking away or think long and hard before agreeing to the higher price.  Each buyer must make decisions based on what they can afford and what works best for them as circumstances vary.