When you’re shopping for a home and find one you want to bid on, the mortgage lender usually requests a property appraisal. Sometimes, the appraisal can go below the sale price. But is a low appraisal good for buyer?
As the home buyer, what happens now? Let’s dive in and figure out is a low appraisal good for a buyer.
What is a home appraisal?
A home appraisal is a report provided by a licensed professional to determine the market value of the property you wish to buy. It protects the buyer’s lender from offering too much money for the home.
Is a low appraisal good for buyer?
The answer to, ‘Is a low appraisal good for buyer?’ is yes… with some caveats. A low appraisal could be very good for you as the home buyer — if the seller decides to lower the price to match the appraisal. However, you’re taking a risk when the appraisal doesn’t support the asking price. It could mean that the house is actually a lemon.
One thing is for sure: a low appraisal doesn’t have to be a deal killer.
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Reasons for a Low Appraisal
- The phase of the real estate cycle may affect the price. Each cycle of real estate will guide you on whether to invest or not. If you’re at a stage where the real estate market is cycling, the asking price of a property may change every day. The best tactic is to ask the seller to show you any offer made on the property.
- Some important details were overlooked. If the appraiser is not aware of the important upgrades the seller made on a property. Features like new appliances, plumbing systems, and bathroom renovations may be overlooked by the appraiser.
- It could be a hot property. Appraisers will always work off the sales transactions, so sometimes the data doesn’t match the price you pay. Not to mention, overbidding can occur in real estate when demand exceeds supply. When this occurs, you have to bring extra cash to the table.
Can the buyer back out if the appraisal is low?
You always have the option to back out of the deal and get your earnest money back if the appraisal is too low. While the best thing a seller can do is to lower the price of the property, this doesn’t always happen. To ensure you’re on the safe side, you should bring in some cash to make in for the difference.
Another smart approach is to ask the seller to carry a second mortgage to make up for the difference between the purchase price and low appraisal. And after the equity of the property increases, you can agree on a balloon payment or cash-out refinance.
You can also ask the lender to order a second appraisal. Because most won’t agree to this, you can ask an independent appraiser to request the lender to compare the two.
When a Low Appraisal Can Be Bad for the Buyer
There’s a high probability that the seller won’t lower the price of a property. Since there are many buyers in the market, there’s no challenge in finding the perfect investor. While making up for the difference may sound like the most feasible solution, the out-of-pocket expenses can make or break your investment.
To ensure you make a worthwhile investment, you should calculate the return you expect from your real estate investment property. That’s the other answer to, ‘Is a low appraisal good for buyer?’
Should you ever pay more than the appraised value for a home?
There’s no law that says that you shouldn’t pay more than the appraised value of the property. But again, a mortgage lender won’t loan you more than the appraised value. If a property’s appraised value is less than the sale price, you may find yourself in uncertain circ*mstances.
If you plan to pay more than the value of your home, you should be ready to ride out the market to gain equity. For a hot property, you can make up for the difference. Alternatively, you can renegotiate the sale price.
Let’s say you were planning to put on a down payment of $50,000 on a $300,000 home. If the appraiser comes in $5,000 low, the buyer could shift the money set aside to make up the difference. This arrangement is subject to the buyers’ approval.
Generally speaking, a lender will only finance 80% of the appraised value. If the offer is lower than the value of the property, you have to weigh the above options. A second opinion will also help you estimate the appraiser’s home value.
Sometimes paying more than the appraisal means that you might end up paying more than what the house is worth. The last resort is to cancel the contract and walk away from the deal.
Agents Compete, You Win.
How to Negotiate with the Seller After a Low Appraisal
Any home that is financed by a mortgage requires an appraisal. In a competitive market, a house can bring in multiple offers. While this may be good news for the seller, it can be tough for the buyer.
So, what happens when the appraisal comes at less than the price you agreed upon? The best strategy is to negotiate with the seller to meet in the middle. If the difference between the appraisal value and sales price is lower, the seller can agree to close the sale. But for this solution to apply, there must be a willingness from both parties.
You can also challenge the low home appraisal. While this may look like a long shot, you can request a second appraisal. The headache with this option is that the final decision ends up in the hands of the lender. Another option is to get an appraisal contingency added to the home buying contract.
If the lender doesn’t have a reason to doubt the second appraisal, they will finance the mortgage. Ideally, your agent will negotiate for the price.
How to Fight a Low Appraisal and Win
Some of the options you have include negotiating, paying the difference, appealing, or backing out. If you want to win an appraisal, collect information for comparative market analysis. This will go a long way in ensuring that you get a fair adjustment for your appraiser.
When the appraisal comes lower than the offer, it’s not the end of the world. Sometimes the answer to, ‘Is a low appraisal good for buyer’ is yes! Before you walk away, make sure you try the above options. Of course, an experienced agent will ensure you don’t find yourself in a less-than-ideal situation when buying a home.
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What should buyer do if appraisal comes in low?
If you are a buyer and the appraisal comes in low, your only real options are to appeal it,request a second appraisalif you suspect there are flaws in the first one, negotiate the purchase price and/or bring more cash to the table.
Do sellers usually lower price after appraisal?
It depends. If the difference is small enough, a seller might lower the sale price to reflect the appraised value. They take less than they thought they were going to get, and you get the home for a price you’re comfortable with.
