Once you find the home you love, you will make an offer and go “under contract”. At that point it may seem like it’s a done deal, but that couldn’t be further from the truth! There is so much that goes on behind the scenes when you are under contract, and an appraisal is one of those things.

Currently in Utah, we are in a very strong sellers market. Homes are being sold for above appraised value every day, but appraisals are also causing a lot of issues with contracts as well. When an appraisal comes back below contract price the buyers and sellers will typically start negotiating to find a solution.

Why do I need an appraisal?

More likely than not, if you are financing your home purchase you will need an appraisal. Your lender will likely require it because they need to make sure that the money they are lending for a home is for a home that is habitable, exists and also that they are not lending more than the value of a home in case of the worst case scenario, which is foreclosure.  To ensure that, they will higher an appraiser that will go to the home and look at the condition. The appraiser will also pull comparable properties and determine differences and what they sold for. The valuation is also based on market trends, time on market, and takes in consideration factors such as upgrades or remodels.  

What does a low appraisal mean?

In most cases, appraisals come back to match whatever the home was listed as. But in some cases, an appraisal determines that the home is worth less than you have offered to pay for it, meaning the lender would be making a bad investment. When this happens there are a couple issues that come up. A lender will only lend on the amount that it appraises for (because that is what they have deemed it to be worth) so if you want to move forward with the purchase, you may have to make up the difference in cash. If that is not an option for you, here are some other options to consider:

• Decide to walk away from the home (make sure you know where your earnest money is going before making this decision)
• Have your agent negotiate with the sellers to match the appraised value, or a number in between.
• Somehow prove the appraisal was made in error with your lender.

What if your appraisal comes back higher than the selling price?

Congratulations! You are going to walk into this home with equity already built. You can rest assured that you got a great deal. In Utah, you do not need to disclose this to the sellers. Your agent will just let the sellers agent know that it appraised and you are moving forward with the purchase.

What can I do about a low appraisal as a buyer?

• Make sure that you do not waive your appraisal contingency when writing your offer. This will ensure that you have the option to exit the purchase if the value comes in lower than the contracted price.
• Remember, the seller obviously wants the sale to go through, so they may be open to negotiations! Work with the sellers agent to see if they will lower the price or help pay for some of the extra costs.
• If you think the appraisal is wrong, submit it for a reevaluation. Ask your agent to submit additional comps for the appraiser to consider.
• Save money so you have more flexibility in putting more down or making up the difference in the case of a low appraisal.

What can I do about a low appraisal as a seller?

• Ask the buyers if they are willing or able to pay for the higher contract price and make up the difference. Some buyers may be willing to!
• Negotiate with the buyers and offer a lower price or offer to pay for a portion of their closing costs. If you don’t have any other offers on the table you may need to be willing to negotiate with the buyers. If you’ve got an all cash buyer in the mix you wont have to deal with a bank or appraisals at all, which can be a bit plus!
• Provide details on any home improvements you have made that the appraiser may have missed.
• Ask for another appraisal, but you will have to pay for it.
• Appeal the appraisal. Have your agent provide recently sold comparable properties that represent the homes value better and why.

As we have established, there is a lot that goes on “behind the scenes” after you go under contract that your agent will take care of. This part of the process is less-known and can make you feel overwhelmed or unsure. Don’t worry, that’s what I’m here for! Email me at mccall@youragentmccall.com and we can go over it and make sure that you understand it completely, which will make the process a lot less intimidating when you are ready.