Every once in a while a Windsor house for sale will receive a low appraisal. Needless to say, this can be extremely upsetting to a seller as well as a buyer. And often times, we don’t know why a home received a lower appraisal as the process to many seems to be more of an art than science. Frustrating? You bet! Cause to panic? Not yet. Yes, for a seller, it is frustrating when a property that is well cared for and tastefully decorated is appraised for a similar amount of an outdated home down the road. But how a home is decorated doesn’t count near as much as how much square footage or bathrooms there are in a home.
Let’s define what a home appraisal actually is: It’s an estimate, given by a professional as to what a home’s current value is. It’s not what a buyer or seller or even a real estate agent thinks it’s worth, but rather a licensed real estate appraiser that is hired by the loan company to protect their interests. A mortgage company doesn’t want to loan more money on a home that is worth less. When this happens, both the buyers and sellers are usually blind-sided. When a normal transaction is suddenly stopped, it can be extremely upsetting to both parties.
How does a low appraisal happen? If a real estate agent has carefully gone over the comps, it’s difficult to know why. Here are some common reasons:
1. The home price is inflated due to a bidding war where multiple offers were received.
2. Home prices declined due to few buyers and a large inventory of homes.
3. The appraiser is inexperienced
4. The appraiser made a mistake and overlooked pending sales data.
5. Too many foreclosures in a neighbourhood without reliable or other comparable comps.
My first word of advice for those that received a low appraisal on a property is not to panic. This may be easier said than done, and it is extremely disappointing, but take a deep breath because both parties do have options.
1. A buyer can make up the amount difference in cash at the time of closing. Keep in mind that a low appraisal doesn’t mean the loan company is walking away from the deal, they will only make a loan based on ratio agreed.
2. The seller can lower the price. Of course, if the home received multiple offers, a seller may decide to go back to one of the other parties that made a bid and see if they will come up with the difference in cash. But often, a seller will adjust the price because they are motivated and don’t want the hassle and expense of putting the home on the market again, especially when they could receive another low appraisal.
3. Order a new appraisal. If the first appraisal was simply inexperienced and did not include important information, a new appraisal can be arranged. The best appraiser to find is one that is local and that knows and understands the neighbourhood.
4. A list of comparable sales can be offered to loan company. Ask them to review. Have agents try to get a list of pending sales and to find out what the actual sales price was on a home about to close. Many agents would be happy to help out if able.
5. Cancel the sale: This is always the last step. But for some buyers, it’s the best move. If a seller won’t lower the price and the buyer doesn’t qualify for the higher price, then they must consider walking away.
When a deal falls through in the middle of escrow, I know how hugely disappointing it is. For a buyer, it’s never easy to let go of a home, especially when everything was moving along so well. And while this may not sound comforting at the time, I tell my clients, for whatever reason a house falls out, that there are other wonderful homes available and we make it a priority to find that home as quickly as possible. Almost always, clients find a home that they like even better than the original property that didn’t go through. It’s funny, but it almost always works out that way and in the end, the buyers are happy.
So as you can see, there are plenty of options should a home receive a low appraisal. And while it doesn’t happen often, it is known to occur, but it doesn’t mean it’s the end of the road. Keep in mind that working with a professional real estate can help you when these detours happen throughout the home buying experience.