Tackling Low Appraisals
By Sadiya Anjum
Once the contract has been drawn up, most people think it is a done deal. An appraisal will indicate the value of the property which is most often close to the sale price. But sometimes the appraised value falls short of the sale price sending the buyer and seller into a panic. Low appraisals, though uncommon, can ruin a deal unless the parties involved take some action in a calm manner.
A low appraisal means that the property’s value is not what it was thought out to be. In a case like this, the loan may not be approved as most lenders will not agree to finance a home with negative equity. This means that the value of the home is lesser than the loan amount and the down payment. There are several options that are open to the buyer at this point.
Larger Down Payment
If the buyer can afford it and really wants the home, then he can consider making up the difference while keeping the same loan amount. This will be possible only if the lender is willing to accept these terms as he may still be hesitant to approve a loan for a home whose value falls short of the price paid.
If both the buyer and seller are keen on making the deal, then sharing the difference in costs is an option. Since both have come this far and negotiations have already been done, then perhaps they can compromise one more time. Splitting the costs is a possibility if the difference is not too high.
If sharing the costs is not an option, then it is time for the seller to bring down the price he stated. If it has been a bumpy ride for him so far, or if he is in immediate need of money, then the seller may be willing to compromise on the price.
Most sales contracts have a contingency clause related to finance which may show the exit door to the buyer. Usually the clause indicates a period of time for finances to be sorted out (meaning a loan approval). If this does not happen, the buyer may have the option to terminate the contract and receive his earnest money deposit. Some other kind of clause may state that if the contract price does not match the appraised value, the buyer has the option to terminate the contract. If a contract does not have any such contingency clause, then it is mandatory for the buyer to make the purchase. Hence it is essential that when a sales contract is drawn up, it covers important details like this.
Challenging the Appraisal
The above options are in the eventuality of the appraisal being an accurate one. In some cases, the appraiser may have made a mistake by overlooking some additions to a home or may have used comparables which do not rightly match the property. Such mistakes do not usually happen but they are not unheard of. The buyer should request for a copy of the appraisal and study it carefully for any discrepancies. Ask the lender to conduct another appraisal in case any mistakes have been made. Most often, it is a problem with the comparables chosen. This occurs if the market is slow and finding a similar home in the area is a problem. Getting another appraisal may save you unless you are hard pressed for time.
If a second appraisal fails and a solution cannot be worked out, perhaps one has to hope for a better deal next time. However it should be remembered that both the buyer and seller have come quite far. At this point, it is wise to reach a compromise and let the transaction take place.
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