Appraisal came in low - What to do?

In a hot real estate market it is very common that a seller's pipe dream becomes reality with the help of a blind-sided buyer – out of necessity, or having fallen in love with the home, or simply not caring about being overcharged.

But the appraisal can easily turn out to be a big bucket of ice water if it arrives way below the contract price.

That may happen for a variety of reasons. One of them can be a lack of comparables – specifically sales data for niche properties such as modern architecture.

Appraisers are certified by the state they work in, and for a property appraisal have very specific property criteria they have to consider, including location, size, built quality, construction details, neighbourhood and recent comparable sales in the vicinity. 

But in my experience some appraisers did not have a lot of exposure to modern architecture, a small niche of the housing market – about two to three percent of the market for single family homes in Southeast Florida; often less in other areas with less modernist homes. Which in turn might lead to a low appraisal.

This is important insofar as over the last 15 to 20 years my proprietary data show that on average modern homes sell consistently for higher prices overall and per square foot than all other single family homes.

Other reasons for a low appraisal include hungry sellers or real estate agents creating a market analysis catering to a seller's aspirational pricing. If that happened knowingly, a buyer will likely encounter a purchase contract clause – mostly called "appraisal waiver" – that prohibits the buyer to cancel the contract because of a low appraisal. As a buyer you should beware this very costly trap.

What can buyer and seller do if the appraisal comes in low?

Bridge the Difference with Cash
The buyer might be able to close the gap between appraised value and contract price with cash. Sometimes a lender objects however, so this route has to be verified. A variant of this solution is for both parties to give a little and meet at a lower price point.

Price Reduction
The seller agrees to a price reduction. In a hot market or for really unique properties in demand the chances for that are... well, close your eyes and what do you see? Exactly, those are the chances. But it is worth asking: a seller and his/her Realtor has to realize that the same obstacle will reappear with the next buyer. And the one after that. And...

Get Comparables
Both parties can ask their agent(s) to present the market analysis (often called a CMA) on which the listing price or purchase price are based, update it if needed and then submit it to the lender, asking to please consider it in a review of the appraisal amount.

Verify the Appraisal
A buyer automatically receives the appraisal, a seller should always ask for a copy (though this a courtesy and not a right). A review is worth the time to check for any obvious mistakes such as wrong square footage, incorrect updates or unacceptable comps. That rarely happens but neither party is obligated to accept the first appraisal. The seller can order his/her own; it's the lender's choice if that will be considered or not. A buyer can ask for a second appraisal; the stronger the reasons the better the chances the lender will order a second report. Again it's the lenders choice but: Don't ask, don't get.

Cancel the Deal
If nothing works, if the appraisal-escape clause is intact and if the cancellation time frame has not expired yet, the buyer can cancel the transaction. There are two possible outcomes: the seller realizes the problematic situation and, having a buyer now versus another contract with another possible buyer later, offers to negotiate a compromise. Or the seller can't/won't compromise and has to find another buyer, while the cancelling buyer has to find another property worth an offer.

Tip
What has proven to be extremely helpful when an appraisal comes in low is having an experienced, clear-headed agent on board (or two, if buyer and seller are working with different Realtors) who has successfully negotiated around such road blocks before. You do not want to be the seller or buyer who pays the tuition for a newbie Realtor in form of loosing a deal.

Questions, comments, experiences? Do let me know please!
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"Appraisal came in low - What to do?" by Tobias Kaiser, CC BY-NC-ND