Part of the process of buying a home, especially if you are getting a loan, is the appraisal. What happens if the appraisal comes in low?
Well, firstly, what is an appraisal? For the purposes of this post we will be addressing the lender’s appraisal as opposed to the tax appraisal, which is a more inaccurate appraisal of a home’s value for property tax purposes and is often outdated.
In order for a bank lending institution to loan money to a prospective home buyer they will send out a certified appraiser to do an in-depth investigation of the property and compare it to like, or as close to like recent sales in the same or similar neighborhood. The amount the bank will lend will be based on the lesser of the resulting appraised value or the purchase price.
It is often difficult for a buyer obtaining a loan to compete with an all-cash buyer since the latter generally does not make an appraisal a contingency of the sale, whereas it is recommended and wise that the loan buyer does not remove the appraisal contingency.
Los Angeles is a highly competitive market for home buyers and sellers often tend to get a little ambitious with their pricing. Even if they price their homes well competition tends to bid the price up to a level where it may not appraise. Your Realtor® will know what comparable properties (comps) have sold for recently, but emotions may get the better of an anxious home buyer, and they will get caught up in that bidding process. Even if there are cash buyers in the mix that does not mean that all is lost. There are ways to ensure that you as a buyer getting a loan can be the successful bidder. Generally when making an over-asking offer that the comps don’t support, you will have an idea that the appraisal may present a problem.
Now you are the chosen buyer here comes the fun. You have passed the home inspection phase and are waiting for the result of the appraisal. The lender tries to get the appraiser out as soon as possible since the contingency period is typically 17 days.
The appraisal comes back lower than the purchase price you have agreed on! So now what do you do? Remember that the lender is only going to loan based on the lesser of the appraised or purchase price, in this case on the appraised price.
Here are your options:
- You can negotiate with the seller to reduce the price to the amount of the appraisal. This will benefit you in terms of property taxes which will be based on the reduced purchase price.
- If the seller refuses to reduce the price, maybe they will credit you the difference, but this scenario is not likely since it would be better for the seller to reduce the price, especially if capital gains on the sale are involved.
- If the seller refuses to budge you can negotiate with the seller to split the difference. It would be in the seller’s interest to do something because the appraised price is not likely to change with a new buyer, and the fact that they did not pick any of the cash buyers before would indicate that they were not the best choice. Putting the property back on the market and starting all over is not going to be their first choice.
- If you really love the home, absolutely, positively must have it, and have the funds, then you can pay the difference between the appraised price and the purchase price. This would hopefully be something your Realtor® will have prepared you for, because not having any wiggle room in the event that the home did not appraise, would not be the best course of action.
- Your last option is to cancel the sale and walk away.
The present competitive Los Angeles real estate market makes home pricing an art. But now you will know your options if the home appraisal comes in low.
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