When getting a home loan, the lender ordered appraisal value needs to at least match the sales price on your purchase contract or it may be canceled by the lender. When the appraisal is low, to keep the contract in escrow, you need to renegotiate with the seller. An increase in your down payment and/or a decrease in their sales price must accommodate the lender’s loan-to-value (LTV) requirement.
Here are some tips when the appraisal value is below sales price:
1. Review the appraisal
Check the property facts used in the report for accuracy as well as the quality of the sold comps selected. It is possible to find errors and/or persuade the appraiser to edit the report by supplying better comps.
If you and the seller are motivated and have the means, a small difference between appraisal value and sales price can usually be negotiated. Typically the party with leverage from the inspection period has the advantage. A larger difference between appraisal value and sales price can put your contract at serious risk. A very low appraisal can be sobering evidence that you should not negotiate. If you or the seller do not have the means to negotiate, request your earnest money and move on to the next home.
Some situations warrant negotiating or perhaps even making up all the difference in value. Appraisers are not perfect and the process itself can be seriously flawed. Issues with appraisals seem to occur most predictably when the following feature(s) are present in the home or comps:
View: Appraisers are not equipped nor have the flexibility to accurately assess the “million dollar view.”
Pool: Value can swing wildly from a liability to a couple hundred thousand dollar asset depending on the location, specs, age, shape, etc. Appraisers ability to assess is limited and often comps are dictated simply by whether the other home has a pool.
Overinvestment in a remodel: If an owner installs the most expensive custom kitchen available in a modest production home, for example, the appraisal will not account for all of the items purchased and installed. Instead, the appraiser will likely assign value matching next best kitchen nearby and no more.
Irregular lots: Lots partially in floodplains, oddly shaped, steeply pitched or hard to use can skew results if the appraiser is mostly considering only lot size.
Busy streets (double yellow lines): Value can be skewed greatly depending on the dangers or nuisance associated with a busy street.
Electrical transmission lines: Uneducated buyers and sellers make erratic decisions about the danger and proximity to transmission lines.
New construction on a lot in an old neighborhood "urban infill": Comps of older homes or even remodels can miss big when directly comparing with nearby new construction. Also, if the appraiser searches for only new comps that end up being too far away, the value can be off.
Hyperlocal value: If the appraiser finds a comp with almost identical features but is 2 miles away, for example, the value can change considerably and be lost in the comparison. Some area values are more sensitive than others.