Bob Kutschbach, owner and broker of Carleton Realty, talks about appraisals and what to do if your home does not appraise in a real estate transaction.
With record prices in the real estate market today, it is not unusual for the appraisal to come in lower than the contract purchase price. Commonly the contract purchase price is more than the listing price. The listing agents set the price at what other houses are typically selling for. The problem arises when an appraiser goes in to appraise the property, they are looking at similar houses in the same neighborhood, the same houses that the listing agent did when setting the price for the house. The appraiser is likely to come up with the conclusion that the listing price was a fair price, but the excess above list that the buyer is willing to pay can’t be justified with the transactions that have closed. What the appraiser doesn’t realize is that the houses that are in contract, the houses that have sold in the last 30 – 45 days may have sold for this much or more. If they were doing the appraisal a month or two from now they would clearly see that the price that the buyer is paying is reasonable.
What are our options? If you think that the appraisal was not done properly, it can be challenged. It must be challenged by the buyer. The buyer and the buyer’s lender hired the appraisal and paid for it. It will not work if the seller tries to challenge the appraisal. Maybe the buyer wants out, afraid of paying too much, and there is very little that the sellers can do in that instance. If the buyer and the buyer’s agent want to challenge it with the lender, they can do so. If they understand the rules of appraising they might be successful. If they know that the appraiser used comps that were too old, far away, or not similar in square feet, bedrooms, or bathrooms, then it is a possibility that the challenge will be successful. If it is not an issue of challenging the appraisal, the seller can come down on price to what the house appraised for as a solution. Another solution is for the buyer to come up with a larger down payment, or the seller and buyer could meet in the middle.
Today the real estate market is so hot, so competitive that buyers are offering to cover the gap between the contract price and appraisal price, called the “appraisal gap”. Buyers are putting into the contract that they will cover up to $10,000 if the appraisal comes in low. The buyer must have the money to cover this. The seller and listing agent will ask for proof of funds that the buyer not only has the money for the down payment and closing costs but also the extra funds needed to cover the appraisal gap.
If a resolution can’t be reached, the deal falls apart. The seller will have to put the house back on the market and the buyer has to look for housing again. In today’s market, there is a lot of work that goes into finding another house to buy or putting a house back on the market and getting an offer. We have to warn buyers because the market is so hot that sometimes when a seller puts a house back on the market a second time, it can sell for even more. This is because in the month or two since the house was originally listed the market prices have gone up. Buyers must think about this when they go back out to look for another house, they may be a little more expensive.
If you have questions about appraisals or the appraisal gap, please reach out to one of our agents!
