With rising home prices and fierce competition among buyers, appraisal shortfalls have become more common.
An appraisal shortfall occurs when a property appraises below the agreed upon price in the contract. There are many reasons that shortfalls can occur.
When this occurs, there is a need for both parties to be calm and reasonable. A low appraisal does not mean the lender isn’t interested, it just means that the lender will only make a loan based on their loan being less than the appraised value.
Potentials Solutions for Low Appraisals
- The buyer can cover the shortage by increasing their down payment at closing (unless they are putting down a deposit above 25 percent of the price.)
- The seller can lower the price. If the home was overpriced or over-valued, the seller has to be willing to make a contract price that works for the lender. The seller may decide that the time and trouble it takes to find another buyer isn’t worth the effort, especially because they might receive a low appraisal from the next buyer’s lender.
- The buyer and seller cover the shortage. This means the buyer comes up with a larger down payment and the seller lowers the price so the parties meet somewhere in the middle.
- The buyer can change lenders and order a new appraisal. This is only an option on conventional loans as FHA and VA appraisals stay with the property for 6 months.
If the parties cannot reach an agreement, the deal falls apart. The seller may decide to take the property off the market, re-list at a lower price or look for a different type of deal, like all cash.
Avoiding appraisal shortfalls requires careful thinking. There are some ways for buyers and sellers to increase their odds for a successful closing:
- Plan ahead. The buyer and their agent should review comps carefully and make sure that they have a plan in case an appraisal comes in low. This eliminates frustration on both sides. You can address this in the purchase offer and avoid any last minute surprises and properly manage expectations.
- Communicate with the appraiser. The seller should make sure that the appraiser gets a list of any comps or features on the home that may not be available to them by searching the MLS. (It also helps if those features are detailed in the listing.)
- Confirm the details. Be sure to double check the specs are correct as it relates to square footage, bedrooms, bathrooms, etc.…
- Have a strategy in case the appraisal doesn’t work out. FHA and VA appraisals stay with the property for 6 months. Sellers need to keep this in mind if they decide to move on, so they don’t have the same issue with the next buyer.
Following these tips will greatly increase your home buyer/selling process, AND keep stress levels lower.