I just read a nice blog posting about how to deal with appraisal issues. That is, a low appraisal and the options that the buyer and seller have. I'd like to speak about how to avoid the issue or, at the least, how to set the proper expectations with the buyer and seller.
First, understand what an appraisal is. It's one person's (albeit a trained professional) option on the most likely sale price of the property, if the lender has to take the home back. Keep in mind that the appraiser has guidelines given to them from the investor (Fannie, Freddie, FHA, VA, USDA). These guidelines mean smaller adjustments for lot size, square footage, extra garage space and other features than they may cost.
Start by looking at the sale comps that the appraiser is going to look at. Assume you are listing a really sweet, move in ready, freshly rehabbed, 1500 sq ft, 3 bedroom home, with a bath and a half, basement and 2 car attached garage for $200,000. If the highest sale comps are at $180,000 or below, you are most likely going to have an appraisal issue. The appraiser just isn't going to have the freedom to make the kind of adjustments that are needed to bump the value up to $200,000.
Discuss with your seller what kind of offer you need to accept to avoid or minimize this issue. If you accept a minimum down payment FHA, VA or even a 5% down conventional loan, the home will need to appraise for the sale price or the buyer will need to come out of pocket for the balance. Money that they most likely don't have or don't want to part with. Better to take a slightly lower 25% down or more Conventional loan or a cash offer. Obviously you don't have to worry about an appraisal with a cash deal and someone putting down 25% or more would still be able to close with a lower value.
Being able to predict a likely sales price is important, but so is predicting and planning for a low appraisal.
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