Feel free to watch my latest video on your options if the appraisal comes in below the purchase price!

If you have been looking to buy a house in this crazy 2023 real estate market in Richmond, Virginia area, you probably know that many buyers are waiving the appraisal.  And if you are getting a loan, it is very likely that the lender is going to want an appraisal done on the house you are going to purchase!

So what happens if the appraisal comes in lower than the purchase price you have agreed to pay the seller?  Does the price automatically drop to the appraised value?  The short answer is NO!

So what are the options available to you in this situation?

Well, first, let’s talk about just what an appraisal is and why the lender will want to have one done!  If you remember back to the 2008 real estate downturn, many of the houses that went to foreclosure ended up not being worth what the bank had in it, so when the borrowers defaulted on their mortgage, the banks ended up selling the houses (either through foreclosure or short sale) but ended up not recouping a lot of the money that had been outstanding on the mortgages.  So a lender is going to want an appraisal to be done on the house by a licensed appraiser to make sure that the house you are buying is really worth what you are paying for it, in case you end up defaulting on the mortgage!

How is the appraisal done?  A licensed appraiser will visit the house, look at the condition, measure the house, note any sort of upgrades and/or improvements to the house and then look at other homes in the area or neighborhood that have recently sold that could be comparable to the home you are purchasing.  They will make adjustments for things like condition, bedrooms, baths, etc. so that all the houses will be as alike as possible in order to objectively come up with a value for the house!  Keep in mind that the appraiser is really an independent third party – they are not really concerned if you end up buying the house or not (the seller, the listing agent, the buyer and the buyer’s agent all have a vested interest in making sure that the house closes).

So what happens if the appraised value comes in below the price you have agreed to pay the seller?  The bank is only going to lend you money based on either the purchase price OR appraised value, WHICHEVER IS LOWER!!!  But the seller expects you to pay them the purchase price that was agreed to in your contract with them!  So here are the options that are available to you in this situation!

RENEGOTIATE THE DEAL!

Your contract gives you the right to go back to the seller and show them a copy of the appraisal and request a reduction in the price to the appraised value!  But keep in mind, the seller does not have to agree to do this!  In some cases the seller will agree to the price reduction.  In some cases, the seller may not agree to the price reduction!  And in other cases, the seller and buyer could try to come to some agreement in which the seller reduces the price but maybe not to the appraised value, and the buyer agrees to come up with the difference!

FIND A NEW LENDER!

This option may not be as easy as you may envision it to be!  Depending on when the appraisal was done, it may affect your closing date if you have to start a new loan application with another lender!  It may also end up costing you more, if the interest rates have gone up in the meantime!  You may have to pay for a new appraisal as well as a new credit report since the new lender will probably not be able to use either of these.  There may be delays because the new lender may have to get new updated bank statements, employment verification, etc.  And, after all this, there is no guarantee that the new appraiser will have a better valuation than the original appraiser did!

CHALLENGE THE APPRAISAL!

You and your Realtor may look over the appraisal and feel that there were better, stronger comps that the appraiser could have used to come up with the value for the home!  If this is the case, as a buyer you have the right to go back to the lender and ask them to request the appraiser to reconsider the valuation based on other comps that you are able to supply!  However, it is really in the discretion of the appraiser as to whether or not they are willing to use these new comps you are supplying to them!

REQUEST A NEW APPRAISAL!

Again, if you feel that the appraised value is way off where it should be, you have the right to go back to your lender and ask them to order a new appraisal!  However, the lender is not obligated to do this!

PAY MORE FOR THE HOUSE!

If none of these options are viable, and you still want to buy the house, you may end up paying more for the house!  But there are also some options here.  For instance, if you were originally going to put down 20%, with an 80% loan to value, it is possible to decrease the down payment (which increases the loan amount).  However, by doing a less than 20% down payment you may have to now pay mortgage insurance.  Check with your lender to see if you are able to pay upfront the mortgage insurance!  Or you could just bring the additional funds (the appraisal differential) to closing.

WALK AWAY FROM THE DEAL!

If all else fails, you have the option to terminate the contract.  However, read through the contract to see what your contract says about terminating it due to the appraisal.  You may have certain deadlines in there so you want to make sure you follow those exactly!

Buying a house has lots of twists and turns in the road.  In a market where houses are appreciating at a rapid pace and for lots of money above the asking price (especially in certain areas where it is not unusual to see offers as much as $100,000 above asking), it is best to have an experienced Realtor at your side to help guide you!  An appraisal below the purchase price is just one of the twists and turns on the homebuying journey you may encounter!

If you have questions, or are considering purchasing a home, or selling a home, feel free to let me know how I can help!