The banks home loan appraisal is lower than the negotiated purchase price…what now?
The first thing I want to say about low home appraisals in relation to the contracted selling price, is that it is happening very frequently in the Indianapolis housing market right now. The reason for this is simple. The market is exploding… in a good way. Beginning with the 2008 housing crisis that cut many home values in half, the market here remained depressed and home values did not really get traction in recovering that value until the last two to three years.
Cut to now, home values in central Indiana have jumped from $120,000 in Jan of 2015 to $160,000 (median home price per MIBOR report). This represents a 30% increase in median home price over an 18 month period.
To further understand how this quickly moving market negatively affects appraisals we have to look at how appraisals are conducted. I will not be going into full USPAP methodology as the intent of this article is to explain what to do after this happens and this information is just a primer on what is driving these “bad” appraisals. But anyway, the core of how an appraisal is done is the same as when a Realtor does a comparative market analysis. The appraiser looks at recent historical sales data for comparable homes, and uses them for the basis for valuing the subject property. The home you are buying or selling.
The problem comes in when the similar homes in the immediate area sold 4-6 months prior. For instance, if we look back at that same median home price report we see that the median home price 6 months prior (Jan 2016…the report is from June) was $135,000. That’s $25,000 lower than that fictional median home is valued right now.
Now appraisers do attempt to account for market growth and have mechanisms for that. Like all mechanisms, they are imperfect though. So we end up with appraisals lagging behind real world values. So, there is the problem.
What do we do about a low home appraisal?
The first thing to do is to review the appraisal and look for any glaring omissions or errors. Most appraisers do an excellent job, but like us they are human and do make errors. When approached professionally, and with factual information they will review the appraisal and possibly modify it based on new or more accurate information. If they are unwilling to make that adjustment, its time for a tough assessment.
Once you know the appraisal isn’t going to be adjusted you have three choices. Pay the difference in cash (because the bank will NOT normally finance over the appraised value), renegotiate the contract, or let the deal die. Lets look at these three options a little closer.
- Pay the difference in cash. While this is the simplest answer, it usually isn’t going to happen for a couple of reasons. The buyer likely does not have the extra money to cover the difference and even when well educated on the ebbs and tides of appraisals, most buyers balk at paying more than the home appraises for even when they were more than willing to pay that same amount prior to seeing the appraisal. Real estate transactions are as much regulated by emotion as by cold facts… and this is one of the situations that it can be very difficult to educate a buyer out of.
- Let the deal die. This is usually the sellers first instinct when they realize that the other option is to accept less money for the home. “I will just put it back on the market”. That is all well and good, until you consider that if the appraisal was done for VA or FHA then it will stand for 90 days. No adjustments can be made to it once it is final. Even if it is not, a new appraiser is likely to rest part of his work on the previous appraisal (whether this is supposed to happen or not) and will likely give a similar result. Which leaves us to…
- Renegotiate the Contract. While, this approach would be a tough row to home in the case of our median home price difference of $25,000…most appraisal misses are a few thousand dollars. With a quality Realtor working by your side, and a reasonable party across the table… we can rework things and find a win-win situation for everyone. It can be a painful process, but with a skilled negotiator like myself….we will get the deal done.
So now that you have a better understanding of one of the 13,247 things that can go wrong in the home buying/selling process AND how it can get fixed with the right Indianapolis Realtor in your corner, do yourself a favor and call Robb at 317-657-8059 or email email@example.com to set your free home buying or selling consultation appointment.