Four Ways to Negotiate a Low Appraisal
You have finally done it! After months of searching all over Spokane market, you found the perfect house and the seller accepted your offer. Then the appraiser comes back with a low appraisal – deciding the home is worth less than you offered. What can you do? Is there any way to keep the sale together? Note that most contracts have an appraisal contingency, which allows you to pull out of the contract and retain your earnest money deposit.
After receiving the news of a low appraisal, you might assume that this is the end of the road. It means the termination of the mortgage unless you can work out a deal with the seller. However, there are a few options available and you may still be able to buy the dream home. A low appraisal presents an opportunity to negotiate with the seller.
Challenge the Low Appraisal
Your first step is to determine why the appraisal came in low. Appraisers determine value by finding three comparable properties to the one you are buying, that have sold in the last 3-6 months. The real estate market has been particularly volatile during 2020 and 2021. This shifting market makes it difficult to determine an accurate market value.
Are the comps really comparable? Did they only look at sold properties? In a rapidly shifting market, even a home that sold 3 months ago might have an outdated price. Have your Realtor pull pending listings as well, and ask if the sales price matches the list price. These new comps can be presented to the appraiser who might reconsider the market value.
If the appraiser is unwilling to make adjustments, then you may need to consider getting a second appraisal. This may also mean changing lenders, as the original lender may not accept the second appraisal. The seller will need to give approval for your request to change lenders (at least in Washington State), and an extension may be necessary to accommodate the additional time it takes to get another appraisal.
Seller Can Adjust the Price to Appraised Value
If the low appraisal seems justified, then it is time to approach the seller with this information. Although unlikely in the competitive Spokane real estate market, it is possible that the seller will be open to lowering the sales price to the appraised value. The Realtor should come armed with the appraisal, comps, and independent analysis that supports or reflects a similar value to the appraisal. A few things to note: the seller does not have to lower the price, if the difference is substantial the seller will be less inclined to make adjustments and know the market. The current direction of the market will make an impact on how the seller interprets the request to reduce the price. Currently, in 2021, it is unlikely that the seller will reduce the price. In Spokane, home values have been going up around 5% per month!
Buyer Can Bring Extra Cash to Close
Many buyers are addressing this as an option when submitting their initial offer on the house. You can incorporate a 22AD – Additional Downpayment, into the purchase and sale contract. This provides assurances to the seller that you are willing and able to bring extra cash to close in a low appraisal situation.
While not ideal for the buyer, bringing additional funds to closing is one way to get around a low appraisal. The bank will issue the loan based on appraisal, and any difference will need to be covered by cash at close. Many buyers are concerned about overpaying for a home in this scenario. This is a valid concern. I counsel buyers to reflect on the home, their emotions surrounding the purchase, what will their expenses be if the sale doesn’t go through, and to educate themselves on the current market. If prices are rising rapidly, then it is less likely they will find a home for less than they love as much as the current home.
Meet in the Middle
If all else fails, split the difference. There are negotiators out there who say to never split the difference, however, in a home purchase, this is an excellent option. Both parties give something up, and in the end, generally feel positive about the transaction. Also, consider what other concessions you can offer the seller in lieu of money. Do they need a rent-back? Can you handle any inspection repairs instead of asking the seller to handle them?
Unfortunately, bringing extra cash to the closing table may not be an option for many buyers. Be sure to communicate that to the sellers. Extra time on the market, and falling out of contract can have a negative impact on the sales price – making it beneficial to both parties to come to an agreement.
Talk to Your Realtor
For additional input and alternative ways to negotiate through a low appraisal, talk to your Realtor. They are professionals and will be able to successfully guide you through this uncertain time.