What Does A Low Appraisal Mean For You?

Let's start off by trying to understand how an appraiser arrives at the price of the home. Typically an appraiser shows up at the house or condo and takes notes and pictures of the home. They look for things like updated kitchens, roofs that need to be repaired, 2 car garages or no garage at all, and many other things about the house that influence the price. They will take into account the location as well. Is this house next to a freeway or a high school? And is the condo situated in a building with neighbors above, below and on each side of you? Or is the home more like a townhouse with only one wall shared with a neighbor? Then they will look at recent sales, usually only using ones within the past 3 months. They will also stay within a certain perimeter of about a mile from the home and look at homes that have a similar amount of square footage. With all these things taken into account, that is where an appraiser gets their price of your home from.
But now you are selling or buying your home and the accepted offer price is $900,000 and you've just received the appraisal back, and to everyone's surprise, the appraisal says the home is is valued at $840,000.  Everyone thought this home would be valued at $900,000 or more according to the opinion of both real estate agents and the buyer and sellers. So what happened and what are your options now? Well, there could be a number of things that happened.  First, the appraiser could simply not be from the area and not understand the value of a certain neighborhood or area. We all here in LA know that you can have million dollar homes on one street and just a few blocks away, the homes could be half that price. So if the appraiser isn't familiar with the area, they can miss the boat on that one. Or perhaps there was a recent foreclosure up the street and since the value of those are typically much lower, maybe the appraiser used that home as part of their comparison. And while there are a lot of great appraisers who do their job very well and work hard to understand a home's value, like any other job, there are sometimes appraisers who just aren't as good at what they do, and that can show when you get a low appraisal on a home where the value should be a sure thing.
So now you've got that low appraisal, what do you do?  Well, there are a number of options and most of these must be agreed upon by both buyer and seller. First option is the buyer simply comes up with the difference in cash and moves forward with the sale. Another option is that the buyer can ask the seller to reduce the price to the appraisal amount so that the buyer can work with their lender and buy the home. Depending on the seller and the condition of the market, this can work in the buyer's favor or not work at all and the seller and buyer must agree to not move forward together in this purchase.  Another more complicated option is that the buyer seeks out a different lender who will use a new appraisal for their loan process.  This can be a pricey and risky gamble since you must pay for another appraisal and run the risk that it may come back low again. And it's risky for the fact that your purchase contract has sensitive time lines on them that must be met.  Sometimes seller's are flexible with these timelines since they know the buying process and obtaining a loan can be complicated but a buyer should get that in writing from a seller if that is the case. A low appraisal can be a speed bump or even a road block in the buying or selling of your home.  But if you are working with a good real estate agent, then hopefully they have explained this process well before the situation comes to play and you are in need of making a big decision of what to do. And if you have any questions about real estate, feel free to call me or email me.