Dealing with a low real estate appraisal

When buying a home, mortgage lenders typically require a property to appraise at or above the purchase price in order to fund a home loan.  This is to ensure that the collateral, the property, is worth more than the loan amount in the event they need to foreclose on the property. 

With the recent changes to the market and the lending environment, low appraisals are unfortunately becoming more and more commonplace.  This article will focus on how to potentially increase an appraisal and what to do if you receive a low appraisal.

If you are selling, here are some things you can do to potentially increase the appraised value of your home. 

1.      Provide a detailed list of every improvement that you made to the property while you owned it.  Did you replace any appliances?  Did you update light fixtures or hardware?  Did you add or replace a deck?  Include the costs of any improvements.  When were the improvements made?  Do you have appropriate building permits and certificates of occupancy?  I would prepare this list in advance and in writing so that you are sure not to forget anything while the appraiser is at your home.   

2.      Make sure both the interior and exterior of the home is clean and clutter free.  The appraisal is based, in part, on the condition of the home compared with other properties in the neighborhood.  A clean and clutter free home is more likely to provide a favorable impression resulting in a higher appraisal amount.  Likewise, if you can, repair broken items or finish any incomplete projects before having the house appraised.   

3.      Make sure the appraiser has access to the entire property.  If you have outbuildings, make sure that they can get into the outbuildings.   

4.      Gather a list of comparable home sales in your area.  What are similar homes selling for?  If you are utilizing the services of a real estate agent, your agent can assist you with these efforts.   

5.      Have documents such a surveys and house plans available for the appraiser to review.  You want to be sure the appraiser has the appropriate lot size and square footage. 

So your appraisal comes in too low, now what? 

You and your real estate agent should review the appraisal to see if there are any errors.  Errors might include the wrong square footage, the wrong lot size, and omitting comparable homes.  Is the information for the comparable homes accurate?  Is the appraiser familiar with the area?  If errors are found, the appraiser may revise his or her report or your lender may be willing to allow a second appraisal.  Please note that it is rare that an appraisal is successfully challenged. 

The parties have several options in dealing with a low appraisal.  Frequently, contracts of sale provide that the deal may be canceled if the appraisal is too low.  Often sellers reduce the purchase price to the appraised value so that the lender will fund the loan and save the deal.  Another option is that the purchaser could make up the difference between the purchase price and the appraised value in cash.  This option is more likely when the appraisal is only a few thousand dollars lower than the purchase price.  The seller and buyer could also agree to meet in the middle.  The seller reduces the price and the buyer brings more cash to the table.  Lastly, the parties may cancel the sale if the contract allows. 

If you need assistance when buying or selling a home, be sure to obtain competent legal representation to guide you through the negotiation process.  This article is not intended to be legal advice and does not establish an attorney client relationship.  If you wish to speak with Ms. Cassidy on a specific legal matter, please contact her at 845-981-7223.