Nothing is worse than having to handle a low appraisal when buying a house in Shoreline, WA. Homes can often get bid-up in competitive multi-offer scenarios and if the home does not appraise for what you agreed to pay for it, the lender won’t be happy.
Buying a home can be a long, drawn-out process with pitfalls along the way. And one of the worst-case scenarios is when you find a house you love, make an offer the seller accepts . . . and then the appraisal comes in substantially below the agreed-upon sale price. This is not uncommon in our hot King County market, and even in Snohomish County we have seen these types of competitive bidding scenarios. Especially in the lower-end of the market.
If the home doesn’t appraise, you may not be able to buy the house because your lender now won’t finance the entire purchase price. But don’t despair, all is not (necessarily) lost! With a great real estate broker on your team, you can navigate this hurdle and uncover the best strategies to handle a low appraisal when buying a house in Shoreline, WA.
How Home Appraisals Work
Numbers don’t lie and the bank who is giving you hundreds of thousands of dollars secured by your property wants to know they are making a secure investment. They don’t care about things like how cute it is. They just want to know what it would be worth if they had to re-sell it after you failed to pay the mortgage. The best indicator of that is what it is objectively worth, today, in the eyes of an appraiser.
Some of us would argue that the “market value” of a home is equivalent to whatever a buyer and seller agree to on the purchase/sale transaction. However, no matter how much you love the house, when you look at it objectively, you don’t want to pay above the fair market value for the house, either. And your bank or mortgage company certainly won’t lend you more than the house is worth according to appraised market value. Lenders protect themselves by lending only at or below fair market value so that if borrowers default, they can recover what they’ve loaned.
How Does The Appraiser Get His Figures:
Generally, in order to arrive at a property’s valuation, the appraiser follows certain steps:
- First he determines what type of appraisal it is: Purchase, Refinance, or Hazard Insurance appraisal.
- Then, he will do a walk-through of the house, taking photos and making notes.
- Next, the appraiser will perform a comparative analysis. This means that the appraiser will look at very similar, recently sold homes in the neighborhood. The price at which these homes sold will give the appraiser a fairly accurate idea of the market value of the home you’re interested in.
Real estate brokers follow similar steps when they do a Comparative Market Analysis (CMA) of your home to determine what it is worth in today’s marketplace.
Let’s look at a home appraisal scenario together:
If we are evaluating a three-bedroom, two-bath, ranch-style home, the appraiser will consider other three-bedroom, two-bath, ranch-style homes within a one- to two-mile radius (or less) that have sold within the last few months. The goal is to find four-to-six recent transactions that are as similar as possible to yours. Adjustments are then made for different features, such as a garage, more recent contruction, a bigger lot, a nice deck, a view, or additional bedrooms or bathrooms.
It doesn’t really matter what you or the seller thinks the home is worth. Its value is determined on the basis of the recent sales of similar, nearby homes.
Most Common Reason for a Low Appraisal
The most common reason for a low appraisal in Shoreline, WA is our quickly rising market and lack of recent market comparables. If, for example, no other three-bedroom, two-bath, ranch-style homes have sold in the area recently, then the appraiser has nothing to compare it against to arrive at a valuation. Also, if the last sale was six months ago, but there has been significant appreciation since then, the older sales may reflect lower values that are no longer representative of where the market is at the moment. The real estate market can change very quickly.
In this case, the appraisal then becomes much more of an educated guess and may be lower than what you expected. And, as a result, it may damage your chances of getting financing at the current sale price.
Handling a Low Appraisal When Buying a House in Shoreline, WA
So… if the “worst” happens and the bank’s appraisal does come in lower than your purchase price, what can you do? Here are a few possible options:
CANCEL THE SALE
One thing you can do in the case of a low appraisal is simply to move on and start looking at other houses. If you had an appraisal contingency in your purchase and sale agreement, you can walk away from the deal after getting a low appraisal.
This probably won’t be your first choice, especially if you really love the house, and you may have already invested money in a property inspection. But it is often the easiest and most stress-free way to handle the situation. If you can’t get the low appraisal value increased, then you’ll have to chip in a big chunk of your own money to make up for what your lender is unwilling to lend.
GET ANOTHER APPRAISAL
If everybody is shocked that the appraisal came in too low, it’s not a bad idea to order another appraisal. While you may have to pay for it yourself, if you can work this out with the lender, you may be able to have the property re-appraised so that it is more in-line with your contracted purchase price.
NEGOTIATE ON THE PRICE WITH THE SELLER
You can also negotiate with the seller and try to get the property owner to come down on the price so that it is more in line with the appraised value. Sometimes sellers are willing to be a little flexible if they know the alternative is a no sale and a house sitting on the market.
PAY THE DIFFERENCE
A less desirable alternative (in terms of financial outlay) is the only guaranteed way to make the sale go through after a low appraisal. That is for you to chip in money to purchase the house. For example, If you were buying a $500,000 house with 20% down, you’d be planning to put in $100,000 already and get a bank loan for $400,000. If the appraisal comes in at $480,000 instead of $500,000, the bank will only lend you $384,000 (that’s 80% of $480,000); so you would have to come up with an additional $16,000 to make up for the shortfall and complete the deal. The bank would pay $384,000 and you would pay ($100,000 + $16,000) $116,000.
WATCH AND WAIT
Another option is just to wait and see what happens. If your appraisal was low, another buyer’s probably will be too. Most appraisers follow a similar method for ascertaining property value. And that means the seller won’t be able to sell the house because other appraisals will come in too low, and the property will sit on the market unsold. When that happens, you can make another offer that is closer to the appraised value – and the seller just may take it.
The Key Ingredient in Handling a Low Appraisal
The best way to handle a low appraisal when buying a house in Shoreline, WA is not to handle it at all. That is, you shouldn’t try to take care of it yourself at all – rather let your experienced agent handle the low appraisal. A good real estate agent knows what homes in the area are worth and will have a significant amount of negotiating experience under her belt.