Here are a buyer’s options when an appraisal comes in low:
1. Negotiate a price reduction with the seller. This option is often not viable in a competitive market like today’s, when sellers have ample back-up offers.
2. Bring in the extra cash necessary to make up the appraisal shortfall. This option too is often not viable b/c buyers lack sufficient cash. Lenders will only lend against the appraised value, and not against contract price. If an appraisal comes in $25,000 under contract, buyers have to bring in that $25,000 over and above their original down payment.
3. Rebut the appraisal. This approach can be surprisingly effective, as long as there is adequate data to support the rebuttal, and as long as the Appraisal Management Company is local and well-managed. Rebuttals almost never worked back in our wholesale/broker days when we were dealing with national Appraisal Management Companies.
4. Change financing to a lower down payment option, to free up cash to make up the shortfall. For example, a buyer planning to put down 20% on a $500,000 purchase could instead put down 10% if the appraisal comes in at $450,000. This buyer could then get 80/10/10 financing, and be “out of pocket” about the same amount he would have been out originally if the appraisal came in at value. Buyers can also switch to FHA financing and only come in with a 3.5% down payment. We have performed these “financing switches” many times to salvage transactions when appraisals come in low.
5. Order a new appraisal. This can only be done if we can prove there are severe “quality issues” with the appraisal. We cannot just order a new appraisal b/c we don’t like the result or the value conclusion.
Jay Voorhees at (925) 855-4491
Real Estate Broker, CA Bureau of Real Estate, BRE# 01524255, NMLS# 335646