The appraisal was done and it is lower than the purchase price, what do I do?

The lender so far has asked the buyer to obtain all document to support a loan and for the issuance of a mortgage commitment. The commitment states, among other things, that a satisfactory appraisal must be performed.  So, this is not really a commitment, but, as a buyer, you are, nonetheless, excited.  The appraisal is ordered and the home that you are purchasing (or that you are selling) is lower than the purchase price.  What do you do?

I am assuming that you signed a standard form contract, which has a mortgage contingency clause providing that a commitment is not deemed firm unless an appraisal is performed and satisfactory to the lender.

As a purchaser, I most certainly would not want to purchase a home that is worth less than the appraisal.  If I am a seller, I am screaming the appraiser made a mistake.  Under this scenario, there are options for each party depending on what the parties’ intentions.

  1. Renegotiate the purchase price.  A seller may realize that the purchase price is high and given the comparables in the area, the seller reduces the purchase price.   The buyer is happy because the purchase price is reduced and the deal can be complete (for less than the original offer).  The seller is happy (well, not so really happy) because his/her house is sold.
  2. Request an appeal of the appraisal.  With the newly changed banking laws and regulations, appraisers are chosen on a lottery basis from the lender.  Meaning that the lender does not pick the appraiser based upon geographic area.  While it is thought that this may give a bank an unbiased opinion of the property value, one of the negatives for consumers in transaction is that the appraiser really may not be familiar with the area and quite often under-appraises the property (if you are an appraiser reading this, I am sorry I have seen this happen numerous times).  An appeal is made by to the lender requesting that a review of the appraisal be performed.
  3. Terminate the contract.  The contract may be terminated because the mortgage contingency cannot be satisfied for the failure of the condition that an appraisal is satisfactory to a lender.  As a buyer, you can request the termination for the failure of meeting the contingency.  As a seller you can cancel the contract because you are not willing to reduce the purchase price.  The deal is mutually cancelled by the parties.
  4. Complete the deal as is.  As a purchaser, if your lender will permit the deal to occur despite the low appraisal, you can come up with the difference to complete the transaction. All real property is unique and there can be a myriad of reasons why you would want to complete this transaction.  As a seller, this is what you want – selling the house at the original purchase price.

What should I do?

In all practicality, if the appraisal appears justified, as a seller you must still sell your house to someone and you may be faced with the same problem. As an example, you are selling your house in a clustered development (all houses appear to be the same size and look).  The house next door to you sells for $300,000 just two months prior.  Your buyer is paying $315,000.  Nice job by the realtor to get you the extra $15,000.  However, the appraisal comes in short because the appraiser cites the property two doors down as a comparable (in fact it does not get any better for the appraiser) for the $300,000 value.  As a seller, your hands are tied because it would be hard to justify an increase in the purchase price to $315,000 as the same exact house sold for $300,000 a couple of months ago.

So, as a seller you say, I have options – I will sell the property to someone else.  Well, remember this, the comparable of two doors down will always come up and be difficult for you to overcome for the any buyer.  Of course, if you are lucky enough to get an all cash buyer there is no issue (usually these contracts are not contingent upon a satisfactory appraisal), but these buyers are not easy to come by.

But, wait a minute, my kitchen has granite countertops, the other house is not updated since the owners moved in, I have landscaping, I have beautiful hardwood floors, my kitchen is custom-made, etc.  This is where you say, my house is not really the same as the house two doors down and you request an appeal of the appraisal.

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