Whenever an appraisal comes in under contract price, we work quickly to consider all options with both agents and buyers, and we can usually resolve appraisal issues within a day if everyone is responsive.
Below are five of the options available when an appraisal comes in under contract price.
1. Rebut the appraisal.
This approach can be surprisingly effective, as long as there is adequate data to support the rebuttal, and as long as the appraisal management company is local and well-managed (back in our broker days when we were forced to use large, nationwide appraisal firms, our rebuttal efforts were rarely successful). This, however, is a friendly warning that rebuttals almost never work for VA financing, as the VA requires all lenders to use “VA approved” appraisers who, like the nationwide appraisal firms, tend to be a bit more obstinate when it comes to rebuttals.
2. Bring in the extra cash necessary to make up the appraisal shortfall.
Lenders will only lend against the lower of the appraised value or the contract price. If an appraisal comes in $25,000 under contract, buyers must bring in that $25,000 over and above their original down payment. If a buyer lacks sufficient cash to cover the shortfall, then we need to focus on one of the other four options.
3. Change financing to a lower down payment option, to free up cash to make up the shortfall.
For example, a buyer planning to put down 20% on a $500,000 purchase could instead put down 10% if the appraisal comes in $50,000 lower at $450,000. This buyer could then get 80/10/10 financing, and be “out of pocket” about the same amount he would have been out originally if the appraisal had come in at contract price. Buyers can also switch to FHA financing and only come in with a 3.5% down payment. We have performed these “financing switches” many times to salvage transactions when appraisals come in low.
4. Negotiate a price reduction with the seller.
This option is often not viable in a competitive market, when sellers have ample backup offers. That said, we have seen some realtors work wonders with price reductions by appealing to the seller’s desire to sell quickly and easily. Usually, by the time the appraisal is in, we have full loan approval and can sweeten a price reduction with a removal of all contingencies.
5. Order a new appraisal.
This can only be done if we can prove there are severe “quality issues” with the appraisal, e.g. the appraiser made significant mistakes with measurements, room counts, location factors, data analysis, etc. We cannot just order a new appraisal because we don’t like the result or the value conclusion; we have to prove and document the “quality issues” or we risk running afoul of both regulators and the investors that buy our loans.
