It’s a nightmare situation: You’ve spent months searching for your dream house, finally get an offer accepted, and then … the house doesn’t appraise for the agreed-upon price.
Take a Deep Breath
But you’re not alone. This situation happens more often than you might think, especially in rising markets.
Sometimes the comparable sales aren’t applicable to the home you want, or maybe distressed sales in the area have skewed the appraisal.
“Traditional lenders will generally only lend funds up to a certain percentage of the appraised value [80% of appraised value as opposed to 80% of the contract price],” says Michael R. Santana, a Florida attorney.
If the appraisal is less than your offer, you might need to come up with more cash—but you do have other options.
Look Over the Appraisal Contingency Clause
An appraisal contingency clause built into your contract means you can reevaluate the situation or renegotiate. But even with a contingency clause, you could end up spending more or walking away to look for another house.
Sometimes all parties need to band together to make the deal work: sellers, buyers, and agents. Sellers might come down on price, you might pay closing costs, and agents might take less of a commission—but the deal still goes through.
Get a Second Opinion
Maybe the appraisal you got was inaccurate. If so? Sam Heskel, CEO of Nadlan Valuation Inc., a New York City appraisal company, recommends a value appeal.
“The appraiser will review the appeal and respond by reevaluating the property or explaining why he or she did not use the comparable sales the lender sent,” says Heskel.
“In some instances, especially if you are well qualified, sellers are willing to pay for the second appraisal to keep the deal on the table,” says Santana. Another option is to try working with your lender to get a second appraisal. They might be willing to accept the subsequent, higher appraisal.
To help guard against a lower appraisal, make sure you let the appraiser know the reason you made the offer you did.
“The selling agent should meet the appraiser at the property to provide comparable sales and listings,” says Casey Fleming, a former appraiser and author of "The Loan Guide: How to Get the Best Possible Mortgage."
Try Not to Pay More Than Appraised Value
You might have found the only house you’ll ever love, but with that mindset, you’re liable to get hurt. Distance yourself a bit.
“Do not pay more than the appraisal,” says Lori Strickland. If you do, you’ll pay more than the house is worth. If you wouldn’t pay more than the list price for a car (or even for shoes for that matter), you generally shouldn’t do so for a house either.
Forget About Whether You're in a Hot Market
Although some buyers pay a premium for houses in hot markets, keep in mind that yours isn’t the only stomach churning at the thought of a low appraisal.
“Even in a hot market, the seller panics when the appraisal comes in low,” says Gary Lucido, president of Lucid Realty in Chicago. Unless cash buyers are ready to swoop in, you can use the low appraisal as an opportunity to renegotiate.
As long as you’re not in a hot market, Tamela Ekstrom, owner of Haven Real Estate in Detroit, says, “the seller will typically drop down and sell for the appraisal amount.” Once people are entrenched in a deal, they usually try to work things out.