Dealing With Low Appraisals When Buying a House
If you’re looking to buy a home, there are a lot of factors you’ll need to consider, especially when it comes to costs. From your down payment, to closing costs, to your monthly mortgage payments, you’re probably so sick of talking to your lender and crunching numbers!
Now we know you might not love to hear it, but there are other costs you may need to be aware of before preparing to close on your home. One things that may come up? A low appraisal.
But, what on earth is an appraisal? And, how do you even deal with such a thing?!
Keep reading to learn not only what an appraisal is, but how to deal with one anywhere in the U.S.! We’ll even show you specific examples from our home city of Austin, Texas. And if all this information still isn’t enough to make you feel ready to buy a home, you can always take our free mini-course:
But save that part for later…
Dealing With Low Appraisals When Buying A House
A home appraisal determines the value of the building!
What is an Appraisal?
When you make an offer on a property, the next steps are to have a home inspection, which is an examination of the property’s condition, and schedule a home appraisal. This process determines the value of the building.
So let’s say you made an offer on a house for $350,000, you would want the appraisal to come back at $350,000 or above. This means that your home is valued at what you’re paying or worth even more.
Now here’s the thing: if the appraisal is anything lower than $350K, changes will have to be made. That is called a low appraisal, and we’ll get more into detail about that further along.
Who Schedules an Appraisal?
Your lender typically schedules an appraisal on behalf of the buyer (you!). This is why it’s important for you to choose a reputable lender.
It’s important to have an efficient communicator who stays on schedule and orders the appraisal pretty quickly after going under contract. Many big banks are not good at communicating with their clients, so ask your Realtor and friends and family for recommendations (or ask us if you live outside of Austin). It’s important, especially for first-time buyers, to be able to have as much communication with their lender as they need.
Live in Austin and plan to work with our team? We have a list of reputable lenders in the area that our clients love working with! Set up a call with one of our Realtors, and let them know you need a lender.
Who Pays for an Appraisal?
The buyer usually pays appraisals upfront, before closing. Remember that closings usually take about 30-45 days. Your lender should go over your predicted closing costs total with you, and an appraisal will be accounted for in that amount.
Typically, an appraisal is about $450 to $550. An investment property can be around $650, and large properties or properties with large acreage can be in the $800s. So definitely consider the property you’re looking for, and how much that appraisal could cost you before looking to buy.
What Happens if the House Doesn’t Appraise?
Now the part you may be scared of: a low appraisal. As previously mentioned, this means that your home has been valued under the price you offered on the home. So, now what? How can you remedy the situation?
1. Renegotiate to the lower price. If there weren’t any prior agreements written in the contract concerning the appraisal outcome, you might be able to come to an agreement with the seller about lowering the price. BUT we would like to clarify that this often won’t hold up in a hot market, which we are currently experiencing in Austin and beyond.
2. Back out under the financing clause or appraisal clause if there is one. You can back out of the contract. At this point, you would get your earnest money back (usually 1-3% of the sales price). You would not get back your option money (can be anywhere from $100-$300+). You would also not get back the money you spent on an inspection and appraisal. Again, if you are in a hot market, there’s a good chance you’ve waived these clauses, so this won’t apply to you.
3. Pay the difference in cash. Let’s say you made an offer on a house for $350,000 and the appraisal came back at $345,000. You would need to come up with the difference, so $5,000 cash.
4. Get a new appraisal for a higher amount (probably not your best option). Getting a new appraisal wouldn’t necessarily be in your best interest unless the appraiser used old comps to get the appraisal number, and you don’t think they are reputable.
Sometimes, it’s good to contact the appraiser if you believe the outcome isn’t right. Your agent will help you with this.
An appraiser typically compares your home to similar properties that have sold in the area. Your agent can also send supporting comps and any upgrades that support a higher price.
Let’s look at an example:
Consider a $100,000 home (unlikely price, but makes the math easier). If a buyer has a 20% down payment and the lender agrees to finance 80%, then the maximum amount of the loan is 80% of the value of the home. If the house appraises for $100,000 then the lender will loan 80,000, so everything is good to go. If the house appraises for $90,000, the lender will still only loan up to 80% or in this case $72,000. The buyer either needs to come up with another $8,000 for the down payment, the seller needs to reduce the price, or the buyer needs to explore other options.
Appraisals in the Austin Market
So when should you be concerned? A buyer should be worried with a low appraisal if there are no supporting past sales in the area that validate their offer price. This can often happen if there is a multiple-offer situation. A home’s sale price may be driven up because of competition, which is very common in the current market. If your offer is way above the selling price, the seller may require you to add an appraisal contingency in your offer. This states that you agree to pay extra cash, AKA a higher down payment, if the appraisal comes in short.
But, don’t think multiple offers always means you’ll be facing an appraisal issue. Sometimes, a seller will purposely price their home low to increase their options and get the price they want. Always have your Realtor send you supporting comps for what has sold around the neighborhood. This will help you when deciding how to make an offer.
Conclusion:
There are a few questions to ask yourself when making an offer on a house with a lot of competition that had a low appraisal. How badly do you want this house? Do you feel it is worth it? Are you willing to pay that out of pocket? If not, are you willing to walk away and not look back? At the end of the day, an appraisal is still just an opinion. Historically the value of a property is what a willing buyer wants to pay. It’s your choice!
Do you want to learn more about buying a home, and are looking for some in-depth guidance? Check out our first-time buyer course! It will not only teach you every step to buying your first home, but also teach you how to make that home an investment.
Ready to chat with an agent and buy your first home? We can help you buy a home in the Austin area, or connect you with an agent elsewhere in the U.S. that will guide you along the way!
