Real Estate: Appraisal come in low, now what?

By Kristin Piccone

The Real Estate market is experiencing an all-time low in inventory, not just in Maine, but across the country.  The historical low interest rates have created a surge in the amount of buyers with increased buying power, as a result.  Consequently, this is creating excessive bidding wars when a home hits the market for sale.  Sometimes there are buyers with financing and sometimes there are buyers with cash.  No matter what a buyer’s terms are within their offer; if there is a financing contingency and the buyer is putting less than 20 percent down; the property is likely going to require an appraisal. 

What is an appraisal? An appraisal is an evaluation ordered by the lending institution to ensure and protect the buyer and the lender from paying too much.  The appraised value must be at or above the purchase price, not loan amount.  By the time an appraisal has happened, a buyer is already under contract on a home and has, more times than not, completed most or all of their due diligence.  With this, time and money has been spent and maybe even several types of negotiations between real estate agents, buyers and sellers.

Ironically, the appraisal comes as one of the latter items to be checked off within a transaction, unfortunately.  It can create stress and tension when its down to a week before closing, for example, and everyone finds out ~ appraisal came in low.  Now what?

In my professional experience, there are options (I love options!).  In no particular order, here are some things that can be done:

Option 1: Buyer and Seller can agree that seller will reduce to the price of the appraised value.

Option 2: Buyer and Seller can agree that they will “split the difference.”  For example, let’s say the purchase price is $300,000.  Appraised value comes in at $285,000.  That is a $15,000 difference.  By splitting the difference, it can be done by reducing the purchase price by $7,500 (now, $292,500) and the buyer will bring an extra $7,500 to the closing table.  The seller receives $7,500 less for the property and the buyer brings more money to the table.

Option 3: Buyer and Seller can agree to work the numbers in any fashion to create a win-win for both parties.  As in my example above, it was a 50/50 split.  However, it could be any arrangement, for example 80/20; 70/30; 60/40, and so on.

Option 4: Dispute the appraisal value.  Generally, it would be the listing agent to write a letter to the underwriting department of the financial institution or complete a guideline form issued by the lender for completion and submission.  Within the letter or form, it would be likely that the listing agent would need to provide supporting evidence and information that supports the current purchase price.  For your reading pleasure, I will summarize and say, the appraiser will re-evaluate their report.  There are no promises, but a new appraised value could be given; it could remain the same, or it could be lower.

Option 5: Request a second opinion.  With this option and depending upon the financing type; you may or may not be allowed a second opinion.  For example, with FHA financing, you cannot get a second opinion unless there is underwriter agreed justification.  It is also worth noting that if the underwriter agrees to and can justify a second opinion, the second opinion appraised value is what you are “stuck with.”  Further, this FHA appraisal “sticks” with the property for six months. 

What does this mean?  This means that if a buyer and seller do not come to terms on any of the options listed above, as a result of the appraised value, the buyer’s financing will, effectively, be denied.  Consequently, the seller will be “back on market” and start back at square one, so to speak.  Since an FHA appraisal report has already been filed from the last buyer; the seller will have to carefully consider their options and who their next “pool of buyers” will be.  Of course, the seller could reduce their list price to meet the last appraised value; however, if that is not the case, the seller would likely limit their buyer pool since the previous FHA appraisal will stay with the property for a minimum of six months.  In my professional experience, I aim to create a win-win for all parties, especially when so deep and in the throughs of a transaction.  It does not always behoove a seller to go “back on market” in a scenario similar to this, as their buyer pool would be lessened, time extended and time = money!

This is a lot of information and can be even more daunting, in real life, however I wanted to keep it simple for the purposes of this column.  If you are considering buying or selling in today’s real estate market, I am a full-time, local, knowledgeable, trusted professional who would love to help you and learn more about your real estate goals! <

Kristin Piccone is a REALTOR for Landing Real Estate in Windham. Reach her at 207-951-1393 or by email at kpiccone@landinghomesmaine.com