What do you do when the appraisal on a home you want to buy comes in below the price in the offer the seller has accepted? You can fight back, there are options, and chances are you can find a way to make the deal work without increasing your down payment. Appraisals are largely based on prices recently paid for comparable local properties. Over the past several years finding those comparables that accurately reflect values has been a challenge. Discounts paid for foreclosures and short sales have created a dual price structure between “normal” and distress sales.
Here are some steps you can take to save the home of your dreams if the appraisal comes in low.
1. Do your research and dispute the appraisal.
Is the contract sales price a fair assessment of the property value based on a well-prepared comparable market analysis from your Realtor as opposed to an online AVM? Was the appraisal done by an appraisal management company that may have used an out of town appraiser?Disputing an appraisal may sound aggressive but you might be the victim of a poorly prepared appraisal. Do some research first before starting a dispute.
You have the right to get a copy of the appraisal from your lender. What is the appraiser’s reputation? Have any complaints been filed with your state appraisal licensing agency? Where is the appraiser based? Did the appraiser have adequate information about the subject property? If your appraisal was conducted by an out-of-town appraiser unfamiliar with your market, you have every right to demand a new appraisal.
What comparables did they use? Ask your Realtor and the seller’s agent to put together a list of recent comparable sales that justify the sales price. Submit that list to the underwriter and ask for a review of the appraisal. The key to a successful dispute is data. You will need as much data you can get to back up your dispute.
2. Have The Seller Lower the price. By far, this is the easiest solution, especially if your appraisal comes in less than 10 percent of the contract price. Obviously, a lower price is a great idea for the buyer, but why would a seller go along? In July, 2011 the average home in America took 88 days to sell. Demand is soft and time is money. Your seller, particularly if they are selling to buy another home, could be in a real bind if you are forced to back out and they have to put the house on the market again.
3. Ask the lender for a new appraisal. Should you find that you have a good case that the appraisal wasn’t fair or accurate, ask your lender for a new appraisal, which you may be charged for. Another strategy is to get two additional, unbiased appraisals and use the average of all three to arrive at a fair price. This is a risky strategy, in light of the fact that another appraisal might not come in higher than your first; it might even be lower if values have fallen.
4. Get your own, independent appraisal. If you order your own appraisal and your loan is an FHA loan, ask the lender for a list of approved appraisers. Usually the bank will review your appraisal and ask the previous appraiser if they agree or disagree with the newly submitted one. If the first appraiser disputes your appraisal, the bank may request a third appraisal. However, if the first appraiser agrees with the disputes you present, they may adjust their original appraisal and you may get a better price.
Depending on how convincing your argument is, your lender has the ability to override the appraisal estimate, which is unlikely, or to order a new appraisal, which is more likely. If a new appraisal is ordered, talk with your agent about somehow splitting the cost with the seller. Perhaps the listing agent and selling agent will split the fee so the buyer does not have to incur additional costs associated with the transaction. Appraisals cost around $400 or so.
If these tactics fail and you cannot make up the shortfall in the appraised value, you may find yourself moving on. If so, be sure that you were protected by a contingency clause in the sales contract, stating that the transaction can be terminated if the home doesn’t appraise at, or above, the sales price.
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