ARRRRGHHH!  The Appraisal Came In Low

                                                              nathanbangs.com

  My little illustration is an accurate representation of the reaction when an appraisal comes in low. Nothing stops a transaction dead in its tracks as quickly as an appraisal that is lower than the sale price of a home. No buyer wants to buy a home that is overpriced, that is certain and no real estate professional wants to take a listing that they judge to be overpriced. A listing agent spends a fair amount of time going over neighborhood sales numbers trying to hit the sweet spot-i.e. the price at which the seller can achieve the best price for his/her home, but at the same time a price within the reasonable norms of the neighborhood. One can generalize that when a purchase contract is executed, two real estate professionals, a buyer, and a seller have come to an agreement as to what a property is worth. Afterall, it is sales that make a market. And then the appraiser comes along and blows the whole thing up. That's what it feels like, though that may not be the case at all.

  An appraisal is not a computation with a correct or incorrect answer. It is a snapshot of the market at a particular moment. Data that informs the market changes constantly. It is the job of the appraiser to sort through the data to find the best choices to use for comparable sales to establish value. Most of the time the appraisal comes in at the sale price or with a few thousand dollars to spare.

  But if it is the home that you are buying or selling that has a low appraisal all those other appraisals don't matter. What happens then?
From the lender's point of view, it is purely mathematical. If the loan is 5% down, the lender will loan 95% of the sale price or appraised value assuming the appraised value is lower than the sale price. So a home that everyone thought was worth $100,000 that appraised at $95000 will have a decreased loan amount. If the seller insists on obtaining a $100,000 sale price, then the buyer will have to increase the down payment amount by $5000 to cover the shortfall between the lowered mortgage and the sale price. The lender doesn't want to finance an over priced home any more than a buyer wants to buy one. And, since the lender is the party with the most skin in the game, it is a reasonable position.

  On the one hand, the reason homes are appraised is to ensure that the lender isn't loaning more money than the property is worth. The appraiser is the lender's eyes and ears. On the other hand, an appraisal also protects the consumer from unknowingly purchasing a property that is overpriced.

  As I mentioned, one solution is that the buyer makes up the difference in in value with an increased down payment. Generally, buyers don't much care to do that or have the ability to do that. So then it falls on the listing agent to work with the buyer's agent (assuming that is the wish of the buyer) to justify the sale price to the appraiser to see if the appraiser will accept a change to the appraisal. The listing agent might have a comparable property that they used to price the home that the appraiser didn't find. Or perhaps the appraiser made a mistake. It happens. Or the buyer may decide they want no part of the transaction and walk away at this point.

  Keep in mind the reason for the appraisal is to protect both the lender and the buyer. So no buyer should be coerced into paying more for a home than it is worth. And of course, the lender has the ultimate decision on whether or not they will accept an amended appraisal. So while an appraisal can be challenged, unless the appraiser made a mistake and acknowledges the mistake, chances are the value probably won't change.

  Typically, in these types of situations, if the shortfall is not excessive, the buyer and seller can negotiate to split the difference, or in many cases the seller will accept the lower price rather than go to the trouble of putting the home back on the market, losing an approved buyer, and taking the risk that the house will not appraise again.