The housing market is showing signs of cooling as the pandemic-fueled demand slows, and yet prices still remain high. A report from the National Association of Realtors released in September showed the share of first-time homebuyers to be at a 2½-year low and houses lasting an average of only 17 days on the market. This circumstance creates a tricky situation for lenders who will increasingly be asked, “what happens if the appraisal is lower than the offer?” After all, the market may be slowing, but it remains in the seller’s hands…and this will likely continue until housing inventory catches up with demand. Lenders should thus be prepared to talk clients through what to do when real estate appraisals don’t meet their expectations.
A Guide to Navigating Low Residential Appraisals
When a seller’s home appraises for less than a buyer has agreed to pay, a number of options remain that may save the sale.
1. Seller and Buyer Re-Negotiate
Lenders will only lend the amount needed to cover the appraised value of the home (minus the down payment) which means that, when real estate appraisals come in low, the seller and buyer may need to agree to a new, reduced price in order to save the sale. This may be unlikely in the current, hot market climate which means one of the two options described below may provide a more viable solution.
2. Buyer Assumes a Larger Down Payment
However hard a pill it may be to swallow, those buyers who are able should be prepared to pay a larger down payment to land a sale at the present moment. Doing so allows the buyer to offset the difference between the agreed-upon price and the appraised value, thereby keeping the sale on track. Not everyone has the luxury of being able to do this, however, which leads to the third and final option.
3. An Appraisal Rebuttal is Requested
If the seller will not negotiate a lower price—and the buyer is unable to provide a larger down payment—an appraisal rebuttal may be the only way to save the sale. Here, the buyer’s lender must submit a request that the appraiser re-examines the home. Additional comparable homes and overlooked characteristics may be submitted to shore up the request, and upon the basis of this new evidence, an appraiser will submit a rebuttal response notifying the lender of any change in the home’s determined value.
While none of these offer easy answers to the question of “what happens if the appraisal is lower than the offer?” they are the only viable courses of action in this tricky situation. Residential appraisals, it must be remembered, principally serve to protect the buyer from overpaying so it should come as a relief that they are not easily tampered with no matter the inconvenience they may at times cause.