Deal-breaker? What to do when a home appraisal comes in below your agreed upon sales price

Home Mortgage Associated Press

Housing market trends bode well for sellers this spring, but some may encounter hurdles even after they land a buyer.

Continue Reading Below

Rising home values and a lack of inventory in many markets could set them up to receive competing offers, but that dynamic could also increase the likelihood that the appraised value of the home could fall short of the agreed upon sale price, potentially scuttling the deal.

Banks rely on appraisals to determine whether the size of a mortgage being sought by a homebuyer is justified by the market value of the home they're looking to buy. Lenders do this to ensure that they will be able to recover their funds in the event they have to sell the home should the borrower default on the mortgage.

When an appraisal comes in below the agreed upon price, a buyer may not be able to borrow the amount needed to buy the home. At that point, the buyer usually has to make up the difference with a larger down payment or walk away.

This scenario was widespread in 2010, as foreclosures swelled following the housing bust, resulting in a surge in homes being valued by appraisers below what some buyers were willing to pay.

The same may be happening again, but for very different reasons.

Continue Reading Below

The median price of previously occupied homes has climbed 7.5 percent over the past year to $202,600, according to the National Association of Realtors. One key factor: The inventory of homes for sale was at just 4.6 months in February. That's down from a historic average of around 6 months.

"We're definitely in a market that's shifted since 2012 to one where you're more likely to see a sales price that's above the appraisal," said Daren Blomquist, a vice president at real estate data firm RealtyTrac.

Here are some tips on what home sellers can do if their appraisal disappoints:

— BE PROACTIVE

To determine the market value of a home, an appraiser compares prices of comparable homes recently sold in the area. Then they take an apples-to-apples approach, excluding or making adjustments for certain features, such as a swimming pool or finished basement.

One way to make it less likely that the appraiser will miss something is for the homeowner to provide details on any improvements made to the home, said Lance Coyle, president of the Appraisal Institute, a professional association.

Homeowners can also ask to accompany the appraiser during the inspection, although they should run that by the lender first, as the appraisal is done on behalf of the bank.

— TALK TO THE BUYER

Homeowners can appeal an appraisal, but before taking steps to do that they should find out if the buyer is willing to pay the higher price.

"There are some buyers who will not pay a penny more than the appraised value," said Paul Stone, an agent for the real estate brokerage Redfin in Denver.

Buyers who agree to pay the contract price will be willing to help make the case to their lender in favor of considering an appraisal appeal, he said.

— REVIEW THE APPRAISAL

Ask for a copy of the appraisal report. Federal law requires lenders provide the appraisal upon request within 30 days.

Look for potential factors that the appraiser may have missed when comparing the property to similarly priced homes that sold recently. Does the house require major remodeling, or is the number of bedrooms and baths comparable? Did the appraiser make adjustments for the lot sizes of the homes?

— MAKE YOUR CASE

Most lenders have appraisal appeal procedures, known as reconsiderations of value.

With the buyer's permission, contact the lender and show them any discrepancies or information that the appraiser didn't consider in the assessment.

One option is to ask the lender to order a second appraisal for comparison purposes. If the lender agrees, that can run from about $200 and up, depending on the home. And there's no guarantee the new appraisal will turn out any different.

Ultimately, the original appraiser will determine whether any information submitted in the appeal merits a change to the initial appraisal.

— NEGOTIATE

If the original appraisal stands following an appeal, the process is over.

At this point the sale will likely fall through, unless the buyer can kick in a bigger down payment to cover the difference between the loan and the contract price.

"From the buyers' perspective, if the appraisal comes in low, it's either an opportunity to renegotiate the price or it means you're overpaying," said Greg McBride, chief financial analyst at Bankrate.com.

Still, in markets where the inventory of homes for sale is particularly tight, there will be more pressure on the buyer to make up the difference in the appraised value versus the contract price, particularly if it's only a few thousand dollars.