A low home appraisal can quickly change the conversation in a real estate transaction. Everything may have been moving along normally, and then the appraisal comes back below the price the buyer and seller agreed to.
Your client will probably have questions right away. Does the seller have to lower the price? Does the buyer have to come up with more money? Can the deal still close?
For a newer agent, this is a good time to slow down, review the contract, and get your broker involved rather than trying to give your client an immediate answer.
What Does a Low Appraisal Mean?
Let’s say your buyer is under contract for $400,000, but the appraisal comes back at $385,000.
That doesn’t automatically mean the home is only worth $385,000 or that the seller has to change the price. It means the appraiser reached a different opinion of value based on the property, market information, comparable sales, and other factors considered in the appraisal.
Where things go from there depends on the contract, financing, and the decisions made by the people involved.
Why the Appraisal Matters to the Lender
When a buyer is financing a home, the lender has an interest in the property’s value because the home is being used as collateral for the loan.
If the appraisal comes in below the contract price, the lender may base its loan calculations on the appraised value rather than the amount the buyer agreed to pay.
This is where financing questions should go back to the lender.
You can help keep communication moving, but don’t try to calculate what the buyer will need to bring to closing or tell them what the lender will approve. Let the loan officer explain how the appraisal affects that particular buyer’s financing.
Go Back to the Contract
Before telling your client what they can or can’t do, pull up the contract.
Look at the financing and appraisal provisions that apply to the transaction, along with any deadlines that may matter. If you’re not sure how a provision applies, talk with your broker.
Avoid saying things like, “The seller has to lower the price,” or “You can just cancel.” Those statements may not apply to the contract you’re working with.
Your client needs to understand the choices available in their particular transaction, not what happened in another deal you heard about.
The Buyer and Seller May Need to Talk About Price
A low appraisal may lead to another conversation about the purchase price.
Depending on the contract and circumstances, the parties may discuss whether the seller is willing to change the price, whether the buyer is willing and able to bring additional funds, or whether another solution makes sense.
This can be a stressful conversation for both sides.
A seller may feel the agreed-upon price is fair. A buyer may still love the property but be uncomfortable paying more than the appraised value.
Your job is to help your client understand what’s happening and work through the transaction without promising what the other side will agree to.
Can an Appraisal Be Reviewed?
Your client may ask whether anything can be done if they believe the appraisal is wrong.
Start by talking with the lender about the process available for that loan. There may be a way to raise concerns about factual errors or provide additional information for consideration.
If your broker recommends reviewing the appraisal, look carefully at the information used. Check property details and comparable sales for anything that may need clarification.
Don’t promise your client that the value will change. You may be able to provide information, but the final appraisal decision isn’t yours to make.
Watch the Deadlines
While everyone is discussing the appraisal, the rest of the transaction is still moving.
Keep an eye on any deadlines in the contract and make sure your broker knows what’s happening if you need guidance.
If the buyer needs to speak with the lender, don’t wait several days to make that connection. If paperwork needs to be signed or another decision needs to be made, stay on top of it.
A low appraisal may take some time to work through, but that doesn’t mean the calendar stops.
Keep Your Client Updated
When an appraisal issue comes up, buyers and sellers can get nervous quickly. Don’t disappear while you’re waiting for answers.
Let your client know what’s happening, who you’re waiting to hear from, and when you expect to have another update. If you don’t know something yet, it’s fine to say that.
You might tell them, “I’m checking with the lender and my broker so we can go over what applies to your situation. I’ll call you as soon as I have more information.”
That’s much better than guessing because you feel like you need to give them an answer immediately.
Learn Before You’re in the Middle of One
Your first low appraisal shouldn’t be the first time you’ve heard about how an appraisal can affect a transaction.
Talk with your broker, attend classes, and learn from instructors who can walk you through situations they’ve handled with buyers and sellers. Ask what they’ve seen happen when values came in low and how the agents involved worked through it.
Continuing education at LEAP Real Estate Academy in Orlando gives REALTORS® a chance to keep learning about the situations that come up after a property goes under contract. Hearing real examples in the classroom can make those situations a lot easier to understand when you eventually run into one yourself.
You won’t control what value an appraiser gives a property. What you can control is how well you understand your role, how quickly you communicate, and whether you know when to bring in your broker, lender, or another professional.
Continue your real estate education with LEAP and be better prepared for the situations that come up between contract and closing.
