what if appraisal comes in lower than purchase price?

Asked by Chris, Austin, TX Wed Jul 2, 2008

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Carol Pease, Broker’s answer
Carol Pease,…, Agent, Austin, TX
Wed Jul 2, 2008
Hi Chris:

I've read the answers you've gotten on your question and I agree with my colleagues. I'm also a real estate professional. As a realtor it is my job and responsibility to put my client's interests ahead of my own. Appraisal problems are more frequent in this changing market. As a realtor I would want to renegotiate and protect my client and have done so in the past. Sometimes however, I have not realized how badly they wanted the property. So I ask you: How badly do you want this house? Are you emotionally tied to it? Is it the house of your dreams? Do you feel it is worth it? There are so many questions that need to be weighed by YOU under these circumstances. What is the difference between the appraisal and the purchase price, and are you willing to pay that out of pocket? If not are you willing to walk away and not look back. If there is a co-buyer or spouse involved are you on the same page with them? While appraisers have professional experience which lenders rely upon, at the end of the day it is still just an opinion. Historically the value of a property is what a willing buyer wants to pay. The choice is yours.
Web Reference:  http://www.CarolPease.com
8 votes
Michael Ford, Agent,
Fri Nov 28, 2008
we will assume that you have an appraisal contingency in the contract and that you are timely with raising value as an issue. appraisal contingencies are especially important now that values are dropping and lenders are commonly getting appraisals reviewed.

review the appraisal. if the comps are good, and the reconciliation is skillful, then you cut the price or cancel. if the comps are not appropriate, and the appraiser cannot be convinced that she or he erred, then you might want to have a second appraisal done, not to "make the deal happen" but to have the appraisal be accurate.

if the home is remarkable, and you can cover the difference, you can always bring cash to cover the shortfall.

i must respectfully disagree with ms. foreman, one does not get a $378k house for $349K..one gets a $349k house for $349k...and the builder got a lesson in market risk. many sellers these days are having reality imposed on them by the market. they don't like it but the buyers didn't like it when the market was racing upward either...now it's a buyers market and the negotiated results that are the norm now are to everyones benefit.
3 votes
Lisa Tyrrell, , Austin, TX
Mon Jul 14, 2008

Many good thoughts on this subject. Please be aware that in this current economy and issues with the mortgage industry, they have been extremely conservative in their appraisals...they have been burned too many times. Also, appraisers typically have a unspoken standard of tolerance of 4% high or low...just FYI.

So, as a buyer you simply need to know that there is clause in the contract on the first page that addresses this issue. Also, if you are getting an FHA loan the house must appraise for a certain amount. This means you have a legitimate reason for terminating and receiving earnest money back.

If you want the house anyway, then it is either overpriced or did you roll closing costs and down payment into the loan therefore inflating the price of the house over its true market value? Either way, the only way to purchase it when it does not appraise is to have the seller reduce the price or you come up with the difference in cash.

If the listing agent listed it based upon comparable sales and the buyer's agent advised you on the purchase price based upon comparable sales and the appraiser used the comparable sales, then something is amiss, eh? Common sense should prevail and it would not be hard to see where the error lies... Be calm, ask questions, and realize that in the end you will either buy the house at the price that you are comfortable with, or you will terminate the contract.

Be aware that although the contract says in several places that the earnest money will be refunded to the buyer, the earnest money release form requires the signatures of both buyer and seller to release it from the title company. This usually is not a problem, but if the sellers do not sign it, the title company cannot release it until the dispute is resolved.
2 votes
Jeffrey Schn…, Agent, Austin, TX
Wed Jul 2, 2008

I'm a bit at a loss for some of the advice being given.

You simply cannot afford to go get an appraisal, nor an inspection, prior to making an offer on every potential home you like. Nor should you do so prior to making the offer on even your most cherished candidate. You could end up paying out $800 for the inspection and appraisal, and then never consummate an offer for a number of reasons outside of your control. The seller might get accept an offer from someone else while you're out doing your inspection/appraisal. The seller might decide to take the house off the market. The seller could decide not to respond to your offer, or not take any of your input in negotiating a price. Don't spend a dime before you get an offer in play. Use your buyer's agent to do the leg work on establishing value. That's one of the things you should expect them to be very, very good at!

An appraisal that comes in lower than the offer price is one of the biggest red flags you'll ever get. Do not let others convince you that it's okay, or that if you really like the house you should figure out how to buy it anyway at the offer price. That's ridiculous. Saying that the true value of a home is what a willing buyer pays for it is also ridiculous. If the value is actually lower than the offer price, then the buyer is a willing "stupid" buyer. You definitely don't want to be in that category.

First and foremost, a buyer's agent is supposed to get you the house at the lowest possible total cost, on the best terms. That means your buyer's agent should be using the appraisal to negotiate a lower price, and/or better terms, and nothing else. To suggest that your agent should somehow first look to correct the appraisal, or recommend you go get another appraisal, or help the appraiser understand where he or she made their mistakes is not representing your best interests. Only after they've used the results of the appraisal to renegotiate, should there be any consideration to remedy the discrepancy through the above means. And any remedy should only be done if the agent understands what value you see in the home above what appears to be a third party valuation.

Do not accept “help” from the seller’s agent to correct the appraisal. Why is this in your best interest?

In the end, the lender is looking at the loan-to-value ratio. If you’ve already negotiated what you feel are the lowest cost and terms, then any difference between the appraised value and the purchase price is going to have to come in the form of increased equity on your part (you’re going to have to contribute the difference in additional down payment). When you’re in this situation, after all of the above steps, then consider some of the recommendations already given on how to fix the issue. Ask the lender to order another appraisal, but be careful, this second appraisal will cost you another $350 to $400 and might only validate the results of the first one. And as Bruce said, this is the worst option you have if your goal is to continue with the purchase.

Note that you should seek legal advice, but the standard 8 page resale contract in Texas specifically states under paragraph 4(A)(1) - If the Property does not satisfy the lenders' underwriting requirements for the loan(s), this contract will terminate and the earnest money will be refunded to Buyer. If you checked the box next to this paragraph, and the one next to 4(A)(2), then with an appraisal coming in under value, your lender is going to tell you that the property doesn’t meet their underwriting requirements, plain and simple. Writing something else in to the contract to effect the same result seems unnecessary, and certainly can’t be done by anyone other than you, the seller, or an attorney.

From the seller's perspective as some answered (although you clearly indicated you were a buyer), no buyer in their right mind is going to accept an appraisal from a seller that the seller paid to have done to try to prove why their home is worth what they are asking. Would you?

Don't order title before selling a home. That locks you the seller into a specific title company. If the buyer exercises their legal right to choose the title company (RESPA requirement in every case), then you could be liable for any expenses a title company incurs by opening title.

Good luck, guess you found that home in Cat Mountain or Great Hills eh?

2 votes
Bruce Lynn, Agent, Coppell, TX
Wed Jul 2, 2008
Brett is right on track. Typically the buyer has a few options:
1. Renegotiate to the lower price (best option).
2. Back out under the financing clause or appraisal clause if there is one.
3. Pay the difference in cash.
4. Get a new appraisal for a higher amount (worst option in many cases).

Good luck
Web Reference:  http://www.teamlynn.com
2 votes
Betina Forem…, Agent, Austin, TX
Sat Aug 2, 2008
Dear Chris,
This does not happen often, but with the market shifting right now lenders are tightening up on everything.
Recently I represented a buyer for a new construction home for $378K and when the appraisal came in it was only $349K. This happened because the builder had four other buyers loose their financing and or they were unable to sell their home in another state.

SO to keep from sitting on four homes valued at about $400K each, he elected to have a blow out price reduction. So he dropped the price per SF from $120+ down, to $95 to get some quick sales and reduce his inventory. So when the bank ran the comps for recent sales for our appraisal, voila the house was now only worth $349K. This thrilled my buyer because he really got a $378K home for $349K. I had to lobby for the reduction with the builder. It was not easy and it took some time but we got it.

Good luck on your home purchase & call me if I can help!
Web Reference:  http://www.BetinaForeman.com
1 vote
Chris Tesch, Agent, College Station, TX
Wed Jul 2, 2008
Hi Chris,

Your bank wouldn't approve the loan if the appraisal comes in lower than the purchase price unless you agreed to make up the difference in cash. Several things can happen (and this is definately the year for this, I've seen homes with multiple offers come in low) you can renegotiate the price to the appraised value, your agent or the sellers agent might protest the appraisal (doesn't work in most cases, but sometimes if you have an out of town appraiser you can show them why other homes in the area are selling for more...here we have proximity to the university), or you can cancel out of the contract. The only time that it is clear in a Texas Real Estate Commission Contract is if the deal is FHA the Third Party Finanacing Condition Addendum has a clause that speaks to the appraised value stating that this is the most that HUD will insure. It gives the buyer the privilege and option of proceeding, but essentiall y states that the earnest money will be refunded and the contract terminated if they choose not to in this case.
Web Reference:  http://www.ChrisTesch.com
1 vote
Brett Troskey, Agent, Palm Beach, FL
Wed Jul 2, 2008
Most Realtor contracts has a clause stating that the house must appraise at or above sales price. If it does not, the buyer has the right to cancel the contract and receive their earnest money deposit back or proceed with the sale. In most cases the lender will not finance above the appraised value so the loan amount would be equal to the appraised value and you would need to make up the difference in cash.
1 vote
pjmartinez93, Home Seller, Cutler, CA
Wed Apr 9, 2014
i sign the paper to sell my house and the asking price is still there but my appraisel canlower than what i owe. question is the loan still going though
0 votes
Ken, Both Buyer And Seller, London, CA
Tue May 22, 2012
we have just had the same situation yesterday our mortgage lender has valued the property we wish to purchase 40k less. Estate agent said this never happen before. not true as I see from all the different web sites. He wants to challenge the mortgage lender who we have spoken to and has over 30 years experience of doing evaluations. Poor show really as this whole situation needs to be governed which it isn’t and creates additional costs to buyers and sellers.
0 votes
Alton, Home Owner, Texas
Wed Feb 15, 2012
0 votes
Blanca Dover, Agent, Camarillo, CA
Mon Jan 9, 2012
You have options: 1) You can have your realtor do their own BPO (Broker Price Opinion) to make sure that they agree with the appraisal. If they completely disagree, they can show that appraiser home sales that can help support your offer. 2) You can pay the difference in price 3) You can have the seller pay the difference in price 4) If you are within the 17 days you should be able to pull out, get your deposit back and find another home. 5) Or you can have your realtor renegotiate the price down to the appraisal price because if you are having problems getting the appraisal to match your offer so will the next buyer.
Web Reference:  http://www.blancadover.com
0 votes
Joan Caton, Agent, NAPERVILLE, IL
Fri Nov 11, 2011
As my colleagues noted, there are 3 choices: you pay the difference; the Seller pays the difference; or you walk. However, I find this type of situation can be avoided upfront by the buyer's Realtor doing his/her homework right away--before any offer is submitted. First, a current market analysis that adjusts for differences and time on market must be conducted as a value check; next, the Buyer's Realtor should contact the Seller's Realtor to discover how he/she came up with the listed price; third, Seller comps should be checked for comparability and accuracy in adjustments or lack of them; finally, the Buyer's Realtor must ask if the Seller would be willing to adjust the price down if the appraisal comes in below list price (This often reveals the Seller's level of motivation to sell). Of course, if this upfront homework has not be done, and you want the property, encourage your Realtor to tactfully negotiate a win-win situation...where the buyer buys and the Seller sells. If this does not look like a possibility, then it's probably best that you move on.
0 votes
Linda Trautm…, Agent, Largo, FL
Thu Nov 10, 2011
I would scrutinize the appraisal to determine if all information is correct as to the comps. I have seen an assumption that the home has a 2 car garage when actually it's a tandem and is considered a 3 car garage. If the information on the comps are accurate and within a reasonable distance to the home you are purchasing; then it would be up to the Seller to agree with making any adjustments to the price. If you are securing FHA/VA financing; an Amendatory Clause protects your deposit in the event of a low appraisal.
Good Luck!
0 votes
Jeff Haskett, Agent, Mahomet, IL
Thu Nov 10, 2011
Did your realtor agree with the appraisal? If he/she thinks it was appropriate, lowering the price may be the best option to keep the deal together.
0 votes
John Armstro…, Agent, Bloomington, IL
Thu Nov 10, 2011
Several things could happen. 1- Buyer could ask seller to lower the price to appraise price. Of course the seller has to agree. 2- The bank may require a little more down payment. 3- You could cancel the deal.
0 votes
Michael Ford, Agent,
Tue Oct 11, 2011
shari, appraisals most definitely take into consideration plantings and hardscapes and such. they account for all improvements on a piece of real estate. what they do not account for is potential uses. lenders want to know what is there at the time of the valuation.
0 votes
Shari Jung, , Dallas, TX
Tue Oct 11, 2011
I think there are some good reasons that an appraisal may come in lower than the asking price. Appraisals don't take into account the trees, gardens and hardscape of a home. Some homeowners spent considerable time and money on these assets that are overlooked by the appraised value.

Of course these homes need prospective buyers who can appreciate the value of these additions.
0 votes
Richy, Home Buyer, Cabazon, CA
Sun Aug 7, 2011
Hey chris, im in same situation in escrow got house at 185,000 appraisal came in at 155,000!! im waiting to see what happens. What happened in yur situation???Rich at randm.family1@verizon.net thanks!
0 votes
Debbi(pa), Both Buyer And Seller, 08247
Fri Jan 15, 2010
Is it true that the appraisal must equal the sales price of the home, rather than the amount the buyer wishes to mortgage? In other words, the down payment does not matter? Thanks.
0 votes
Chano, Home Buyer, San Diego County, CA
Mon Sep 28, 2009
I'm in this situation, ... with a twist!

Original Appraisal = $550k
Sale Price Negotiated = $500K
2nd appraisal ordered by my (lender's) bank = $450k!!!!

We went into escrow on this property just days before it was to go to AUCTION.

So now the seller's bank, refuses to sell at $450k because they say it is too late for a short sale!

The seller's owe $415k on the house, but have accumulated $75k in fees and penalties.

So the SELLER'S bank would rather auction this house (for less!) than close the deal in hand because they don't want to short saleand loose their penalty fees....

At auction, they won't get close to $450, but they refuse the offer on the table!


We've been in escrow now for 100+ days, and I'm going CRAZY!!!!
0 votes
Gail Kayajian, , Saint Petersburg, FL
Fri Nov 28, 2008
Coming from a seller perspective, as a real estate broker, I too have seen low appraisals which in most instances can be equitably resolved. However, If the desparity is greater than 100K, it would appear that the appraisal may have been inaccurate. It's not a perfect science. The variables that may have affected the appraisal should be explored such as 1.) The appraiser is not familiar with the area. 2.) The original comps done by the listing agent were too old (greater than 6 months), the comps were not adjusted to subject property or simply inaccurate (In this market, CMA's should be done every 3 months) 3.) Appraisers are now using comps that are no more than 3-6months old and distressed properties have now become usable comps. That, alone can reduce an appraised value by 100K-200K. The listing agent should always be present at an appraisal with adjusted comps in hand and justifying those comps to the appraiser if need be. I assure you, most appraisers are more than happy to have agent input. Just be sure you have all the facts straight before ordering another appraisal because it could come in lower than the first. Keep in mind that most banks, even though the mortgage amount is less that the appraised value, the interest rate could change because of the low appraisal. Check your finance contingency clause to see if there is a specified interest rate ceiling.

The bottom line is to work out an equitable negotiable solution and in most cases, leads to a successful closing. An interesting thought you may want to share with your buyer........if the appraisal came back higher, would they be willing to pay the higher appraised price? Of course we all know the answer to that but it sometimes helps put things into perspective for both buyer and seller.
0 votes
Perry Hender…, Agent, Austin, TX
Wed Jul 2, 2008
I've seen this before in a couple of scenarios:
1. The price is way to high - then you renegotiate if you want the house
2. They didn't have the comps that the "bank" would accept. - Then you have to get other comps.
3. Buyer has Appraiser buddy that gives lower price so he can go back to seller - That happens a lot. In every case you should hire another appraiser - I recommend the I pick three, you pick one of the three to be fair.
4. No comps - Happens All the time in some neighborhoods like Sendero Hills where many transactions are off-market.... Then I usually get off market data from people I know in the area that have sold.
5. Comps are too old - I saw one of these on a 50% down condo deal. The bank wanted 3 months or less back. We basically told them that we'd close anyway.

In other words, under what condition is it not appraising?
0 votes
Mylendingpla…, , Austin, TX
Wed Jul 2, 2008
From a bank perspective:

Banks or mortgage companies won't lend more than the appraised value. So the only option is to renegotiate the price based on the new appraisal. Or order a new appraisal if you feel the first appraisal isn't valid for some reason.

Ordering an appraisal and inspection should often be done before making an offer. After all, if you are serious about buying the home why not remove the issue of the value from the beginning by simply having the mortgage company orders the appraisal upfront?

As a seller, especially if you're going the For Sale by owner route (http://www.austinhouse.net), go ahead and order an appraisal on your own home. It helps you establish and defend your asking price. This makes it much easier to get full asking price when you have a third party appraisal supporting your sales price.

Things you should do before selling:
Order title
Order appraisal
Order inspection...THEN write the sales contract.

Don't know how to order title, apprisals--don't worry these are done by the mortgage company. Just find a good mortgage company to work with (Austin has a bunch of good ones) and go from there.

Jon Spears
Austin Mortgage Broker
0 votes
Connie Herron, Agent, Austin, TX
Wed Jul 2, 2008

I agree with Bruce that renegotiating the sales price to the appraised value seems best for the Buyer. Why would anyone want to pay a higher price especially in this market ? You don't say if the contract is for cash or what type of financing, if any. The TREC Third Party Financing Condition Addendum to the contract for FHA Insured Financing reads: "It is expressly agreed that, notwithstanding any other provision of this contract, the purchaser (Buyer) shall not be obligated to complete the purchase of the property described herein or to incur any penalty by forfeiture of earnest money deposits or otherwise unless the purchaser (Buyer) has been given in accordance with HUD/FHA or VA requirements a written statement issued by the Federal Housing Commissioneer, Department of Veterans Affairs, or a Direct Endorsement Lender setting forth the APPRIASED VALUE OF THE PROPERTY OF NOT LESS THAN $________. THE PURCHASER (BUYER) SHALL HAVE THE PRIVILEGE AND OPTION OF PROCEEDING WITH THE CONSUMMATION OF THE CONTRACT WITHOUT REGARD TO THE AMOUNDT OF THE APPRAISED VALUATION." The Buyer can try to renegotiate the price, bring cash to closing, or terminate under FHA also VA.

But Conventional financing doesn't have the above language in the basic contract. However, a principal to the contract could write in special provisions that the house must appraise for the sales price.

When I'm working for the Seller, I have helped appraisers find data they perhaps have overlooked that would help to support the sales price. This has happend twice in my 15 years in this business. In both cases there was a compromise. We found data that brought the price to the middle, all were happy, and we closed.

Hope this helps. If I can be of assistance, please let me know. Best of luck!

Connie Herron, REALTOR, GRI, ABR
Keller Williams Realty
Web Reference:  http://www.ConnieHerron.com
0 votes
Dominick Dina, Agent, San Antonio, TX
Wed Jul 2, 2008
Hi Chris,

Brett is correct. And it give you, the buyer, leverage to renegotiate the deal for a price equal to or lower than the appraisal.

So it may be a good situation for the buyer.

Good luck!

Dominick Dina, Broker/Owner
Christian Realty San Antonio
0 votes
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