There’s no way around the fact: selling a home means there’s probably going to be a mortgage involved. When a buyer is also a borrower, the lending institution will do every bit of due diligence it can to protect itself and minimize every foreseeable risk. A bank, credit union, or other mortgage lender will not only qualify a borrower by checking credit reports, verifying income, employment, assets, and debts, but also, qualify the collateral property. This is done through a home appraisal, a third-party professional who analyzes a property’s condition, location, and other factors to determine its true market value.
What can a Seller Do about a Low Home Appraisal?
A home appraisal can make or break a home purchase deal because it will either endorse the agreed purchase price or challenge it outright. For instance, if a home purchase contract has the selling price at $250,000, but, the appraisal determines the residence is worth $259,900, that means the collateral is worth more than the home loan — a win for the seller, buyer, and lender. However, numbers which are disparate in a converse manner, such as an agreed purchase price of $225,000 but the appraisal comes-in at $217,000, means the bank won’t take the risk.
“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.” —USA Today
For buyers, this can be a real setback, but they have the option to simply walk away with their earnest money deposit and look for another home. For sellers, a low home appraisal is devastating, because they learn the property just isn’t worth what they thought it to be. A low appraisal will be a disappointment, but doesn’t have to be an overwhelming hindrance. Fortunately, there are some things sellers can do about a low home appraisal:
- Reduce the price. While this might not be an appealing choice, it’s one that will keep the same buyers in the deal which means not having to go through extra time and effort. Buyers who were willing to pay a higher amount for a home will delight at being able to purchase it for less money.
- Request the buyer makeup the difference. If you don’t believe the appraisal is completely accurate and the buyer is still motivate enough, with cash on-hand, you could request the buyer make-up the difference to save the deal.
- Strike a deal in the middle. Another solution is to meet the buyer halfway and both parties contribute to making up the difference. You can ask your listing agent for some ideas on how top do this, either by paying closing costs or other means.
- Challenge the appraisal. Some home sellers choose to challenge the veracity of the appraised amount. It could be the appraiser isn’t really familiar with the area or that he or she didn’t take certain important factors into account.
- Allow the buyer to walk away and relist the home. If you aren’t successful with challenging the appraisal, you could simply move-on and take the home off the market temporarily. Put some thought into what’s dragging the value down and if there’s anything you can correct, put in the time and effort, then relist the property for sale.
Of course, you can always order your own appraisal, and, even if it doesn’t differ with the original, you’ll now have a better baseline on which to reduce your price to get it to sell.