You’ve been house hunting for months. Maybe you’ve even submitted a couple of offers and have been rejected or out-bid. Then you find the one and you don’t want it to slip away. You submit a competitive bid – one over the asking price. Then your offer is accepted (hooray) and you’re ready to close the deal when … BAM. You’re hit smack dab in the face with a low real estate appraisal.
Why is this bad? A low appraisal can be a major blow to a real estate transaction. The entire deal could fall apart because of it if financing is involved.
For example, say you’re purchasing a home with an FHA-backed loan with 3.5 percent down – which means the lender is willing to finance 96.5 percent of the home’s value – and you’ve made an offer on the home for $250,000. That’s a down payment of $8,750 before closing costs.
If the appraisal comes back at $240,000, the lender will only finance $231,600 (96.5%). If the seller won’t lower the price, you would have to contribute nearly $10,000 in additional cash for the down payment. And that may not be possible for you.
So what can you do about a low real estate appraisal that threatens to unravel everything up to this point?
Step 1: Don’t panic. The good news is that home appraisals can be challenged. Here are a few tips on how to save your transaction from a low appraisal:
- Review the appraisal: Obtain a copy of the home appraisal and look it over to see where the misconnect lies. Lenders are required to provide copies of the appraisals to the borrower upon request. You and your real estate agent should review the comparable homes the appraiser used to value your home. This is the most powerful tool you have in disputing the appraisal. Look for key comparisons, such as square footage, lot size, the condition of the home, location and sales date of the comps used.
- Check the comps: Comparable sales, known as comps, are similar homes that have sold recently in the neighborhood. It’s important to ensure the comps used in the appraisal match up to the home you’re buying, especially if some of the surrounding neighborhoods are less desirable. If you find significant discrepancies between the home and the comps used, don’t be afraid to contest them. Have your agent and the seller’s agent put together a list of more suitable comps that justify the price and submit it to the lender.
- Know the home: It’s possible the appraiser missed something and it’s up to you or your agent to know the home you’re buying well enough to spot it. Sometimes, if there’s been a room addition to the home, the appraiser can have a hard time tracking down permits. An unpermitted room addition can lower your home’s value significantly. If you need to, get down to City Hall and dig through the permits yourself until you find what you’re looking for. It’s also important to let the appraiser know if there have been any ‘behind the scenes’ renovations to the home, such as plumbing, electrical or other hidden elements.
- Don’t be humble: If there ever was a time to brag about the home, it’s now. Get together with the seller and put together a list of anything and everything that adds value to the home. Especially items that comparable homes in the neighborhood may not have, such as granite countertops, hardwood floors or central air-conditioning. Maybe the appraiser missed the fact that the home offers sweeping mountain views off the master bedroom or that the downstairs powder room was fully remodeled with high-end accouterments. All this matters, so brag away. And remember, the sellers are at risk with a low appraisal as well, so it’s in their best interest to help you out.
The appraisal is an important step in any real estate transaction involving a loan and it’s not a process that should be taken lightly. You have the right to challenge the outcome.