As buyers work to secure an offer on a home in a competitive market, bidding wars often ensue, driving home prices up.
But an important question to ask is: how much is too much?
What is an appraisal?
Before closing day, a home appraisal will take place if buyers are purchasing the home with a mortgage loan. Since the lender is invested in the purchase of the property, they want to ensure it is a fair investment. In short, they don’t want their borrowers to overpay.
An appraiser walks through the home to determine the current market value based on recent sales in the area and comparable market data. The appraised value helps the lender determine how much money they are willing to loan, based on the loan-to-value (LTV) of the property.
Why do appraisals come in low?
There are a few reasons that appraisal can come in lower than the offer price. In today’s market, bidding wars increase the purchase price of a house, and can raise the price above the appraiser’s value.
In some situations, the appraiser may have some oversights on the location or condition of the home. Other times, it may be difficult to find comparable sales due to a unique home or situation.
What can you do as a buyer if your appraisal comes in low?
If your appraisal comes in low, you will need to make a decision about how to proceed. Options moving forward include:
Ask Sellers for a Price Reduction
In many cases, the seller will lower the purchase price to match to appraisal, knowing that mortgage lenders will not lend more than the appraised value of the home. This means that any buyer who is financing the property will not be able to obtain a loan above the appraised value.
Pay the Difference
Sellers are not always willing to lower the purchase price, even if the appraisal comes in low. Buyers have the opportunity to move forward with the original offer, but need to make up the difference if using a mortgage loan. Sometimes, the buyer and seller meet in the middle instead of one party making up the entire difference.
Sellers can dispute the appraisal or request a second appraisal if they strongly feel the appraised value came in too low. This process can be a bit complicated, so if you find yourself in this scenario, speak with your real estate agent about how to proceed.
Most purchase agreements have a loan contingency. If the buyer can no longer obtain a loan due to a low appraisal, they can walk away from the deal without repercussions.