Everyone knows that 2021 was an unprecedented year when it comes to the real estate market. After a year of staying at home, the demand for housing increased at a rate where the supply just could not keep up. Homes in popular areas would see over fifty offers in just a matter of days and buyers were left to bid far over asking to stand out.
Appraisals are a service performed by a licensed appraiser to use data and research to form an opinion on a property's value. These are ordered by the lender to ensure they are not funding more than the property is worth.
This year, appraisers had a hard time keeping up with the rapid rate in which the market was growing. With buyers going so far over the asking price, we were seeing extreme gaps between purchase price and the appraised value. While appraisers are beginning to catch up to the nature of this housing market, it is important to be prepared for the possibility that the home you're buying may not appraise before you make the offer.
So what are the options if the appraisal comes back low?
Appeal the Appraisal
If your appraisal comes back lower than you or your Realtor expected, I would first recommend appealing the appraisal. If you're going to appeal the appraisal be prepared to have evidence as to why the home should have appraised higher. This could be comps, home improvements that might have been missed, or errors to the report. Your Realtor will advise you as to whether or not you may have a case and do the research to support your argument.
Order a Second Appraisal
At the end of the day an appraisal is just an opinion of the value of a home. Like any other opinion, this will vary person to person. If you and your real estate agent truly think the first appraisal was incorrect, don't be afraid to order a second. Their opinion could be completely different than the first appraisers. While a second appraisal will cost you some extra money, it might be worth it to save the deal!
Ask the Sellers to Lower the Purchase Price
I know, it sounds crazy to ask this in a seller's market, but sometimes it works!
If you have to back out of the deal due to the low appraisal the sellers will have to put their home back on the market. This can be a red flag to other buyers and limit what the sellers can get for their home. They will also have to prepare their home for showings and have their lives disrupted until a second offer is accepted.
Give your Realtor permission to share appraisal report with the sellers. Your real estate agent will handle the negotiations for you. It is quite possible the seller will say no because they have a backup offer waiting for yours to fail, but it is also possible they will lower the price. Just remember that the worst they can say is no!
Reallocate Funds to Cover the Difference
Sometimes there just isn't much a buyer can do other than cover the difference between the appraised price and the purchase price. If you're thinking of offering above asking price, I recommend having a discussion with your lender prior to making an offer. They have an understanding of your finances and will be able to guide you before you get stuck in a contract. Ask them about where you could pull funds to reallocate towards the appraisal gap just in case you get stuck in this situation. This is why it is crucial to have a responsive lender, who even responds on the weekends.