What Happens when an Appraisal Comes in Low
What do you do when an appraisal comes in low? First, let’s talk about “what is an appraisal”? An appraisal is a third party’s opinion of the value of the home. When you are getting a loan on a property, the lender will require that an appraisal is done. An appraiser will come out, they will evaluate the home. They’ll look at comparable sales, make adjustments and say, I think that this home is worth this amount. The lender will only lend based off out of amount.
If you have a $1 million home and it appraises for $980,000, that means that the lender will only lend on that $980,000. We have to look at that difference, that $20,000 and find out what our options are. If you went in with an appraisal contingency, this typically only happens in a softer market, more of a buyers market, then you have a lot more options at your disposal.
When you have an appraisal contingency, that means that you can back out of the contract using that appraisal contingency without losing your earnest money deposit. This also gives you a lot of leverage to negotiate, because if you’re able to back out of the contract, you can go to the seller and say, “Hey, I want you to reduce the purchase price down to that $980,000 or I’m walking away.”
Another option might be in this situation is to split the difference with the seller and you paid $10,000 and the seller pays $10,000. Typically you’re not going to pay that full amount when you have your appraisal contingency, because you have that contingency to back out. So the seller is going to be willing to negotiate with you.
Appraisals in a Hot Seller’s Market
Now let’s look at a hot sellers market, which is really typical right now, and probably for the foreseeable future. You’re probably going to go into the contract without an appraisal contingency. This means you still have to have an appraisal conducted. That lender definitely is going to require that, but you’re eliminating that contingency. In other words, you’re saying “no matter what happens here, I am not going to back out of the contract using an appraisal contingency”. What this looks like in reality is; you might go in and say, “I am willing to pay any difference in that appraisal gap.” If there’s a $20,000 difference, I’m paying that difference. If it’s a $50,000 difference, I am paying that difference. Or you could go in and say, “I’m willing to cover an appraisal gap of a certain amount so that a gap might be $20,000.” So if it appraises $20,000 low, you are willing to pay that $20,000. If it appraises $50,000 low, you’re only willing to pay an additional $20,000 over that appraised value. If it appraises at $950,000, you’re willing to pay $970,000 in the seller would then drop the sales price to that.
Now, if you decided that you don’t want to buy the house anymore, because the appraisal gap was so large and you walk away and you don’t exercise a contingency because you don’t have that appraisal contingency, you’re going to lose your earnest money deposit that you put in. That’s going to be the earnest money deposit is 1% typically the 3% of the purchase price that you put at the beginning of the contract within three business days, and that secures the contract for you. You’re going to lose that money on the $1 Million home. That’s going to be between $10,000 – $30,000.
There are some strategies we can employ to protect you, even when you’re going in without an appraisal contingency that we can discuss in person in a strategy session. But that’s an overview of what would happen if an appraisal comes in low. If you’re looking to buy a home and you want the best strategies to get yourself into a home with the fewest offers and the best terms possible, then please reach out to me via phone, text, or email, and let’s have a conversation. And let’s strategize about how we can help you get into your dream home.
Curtis Chism, Realtor
858-281-2568 | Mobile
mailto:info@sandiegohomes.io
Chism Team | DRE #02105113
brokered by eXp Realty | DRE #01878277
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