Remedies to Save the Transaction
The contract is in place and progressing nicely. The buyers felt it was safe to go ahead with inspections, and the results were acceptable. The closing date is on target. Everyone is waiting for the appraisal results so that a loan commitment letter can be issued. No one is too worried, because the house sold for an appropriate price, and appraisals have a magical way of coming in just where they need to be. Everyone gets a call. The appraisal is $10,000 less than the sales price. Buyers, sellers, and agents panic. Is there anything you can do?
It happens sometimes, and there are often ways to 'fix' the problem. The first thing to do is stay calm. One or both parties may have another contract that hinges on a successful completion of this one, and getting bad news can make everyone a basket case, especially when it's close to closing day.
Seller Reduces Price
Would the seller be willing to reduce the price of the home? Hold on, that's not the only solution, but it is a common one. If the buyers are seeking a mortgage, they can probably back out of the contract due to the financing contingency, since the low appraisal will affect the way the lender views the home. The seller may be willing to deal. (Note: A cash buyer should have been protected with a contingency clause that states she can back out of the deal if the home doesn't appraise at or above the sales price.)
Buyer Pays More Down
The buyer may want the home badly enough to make a larger down payment, but don't assume that will correct the problem. I know of an instance where the buyer was prepared to pay an additional $15,000 down to make a deal work. It was a special type of property that was hard to appraise, and the appraisal came in low. Even though the buyer could have paid more down, the lender would not approve the loan. Talking with a few more local lenders at the time verified that others felt the same way. They did not want to finance a property that the buyer went into with a negative equity, even if the buyer was willing to take the risk.
Blend the Two
Seller and buyer come to an agreement, both giving a little.
Dispute the Appraisal
Ask the lender for another appraisal. They may even pay for it. Find your own comps, and share them with the lender. They may ask you to fill out a form that resembles the one appraisers use to make the comp information more readable.
The lender may send out a new appraiser or ask the original appraiser to reevaluate the property. When working with the original appraiser, try to be helpful, not belligerent. Find out which houses were used as comps, and keep in mind that most appraisers base their opinions on paperwork. They often haven't seen the comps up close and personal the way we do. It could be they used houses you know needed a lot of work, even though it wasn't stated in the MLS. When you explain their condition in a professional manner, appraisers are more likely to investigate the comps to see if adjustments should have been made.
Does the Contract Include Personal Property?
Appraisers only put a value on real property, the land and the improvements to the land. If the contract includes furniture and other types of personal property, it won't be a part of the appraisal.
Is the Seller Paying Funds to the Buyer at Closing?
This type of contract can be killed by a low appraisal, since the house must still usually appraise at the sales price. Always talk with the lender about their cash-back policies and find out what type of wording must be inserted for this type of agreement. Then be prepared to deal with it if the appraisal comes in low.