Low Appraisal

It is important for Buyers and Sellers to understand what happens when an appraisal comes in low during an escrow. When a Buyer is obtaining financing on a property, an appraisal is normally required by their lender to determine the value of the property.  The Buyer’s lender wants to make sure the Buyer is not overpaying for the property they have a large financial interest in as a lender.  If you are a Seller, it is important to hire a real estate team who is familiar with your neighborhood and real estate values in the area.  Our team will make sure the appraiser at your property is knowledgeable about the surrounding area, and if the appraiser is not, we will educate him or her on the neighborhood and local market values.  We have seen appraisers use what they consider “comparable properties” in areas that are not even close to comparable to the subject property.  All of us in the South Bay know in some cities you can be on a street with multi-million-dollar homes, and go just a few blocks away to streets you wouldn’t want to be walking on after dusk.  As a Buyer or Seller, if the Buyer’s appraisal comes in low, we have five options. 

1. First, if we are representing the Buyer, we would ask the Seller to reduce the price to the appraised price.  For example, if a Buyer is in escrow for $825,000, and the appraisal comes in at $817,000, we could ask the Seller to reduce the price to $817,000.

2. Second, if the Seller is not willing to reduce the price, the Buyer has the option to “gap the appraisal”.  For example, let’s say a Buyer putting 20% down is in escrow on a property for $765,000, and the appraisal comes in at $750,000.  Normally, at $765,000, the Buyer’s 20% down payment would be $153,000.  If the appraisal came in at $750,000, the lender will only give an 80% loan on $750,000, and not on $765,000.  Therefore, the Buyer’s down payment would be 20% of $750,000, which is $150,000, PLUS an extra $15,000 in cash to gap the difference between $750,000 and $765,000, making the Buyer’s total down payment $165,000.  This is $12,000 extra than if the appraisal had come in at the value of $765,000.  

3. The third option would be a combination of the above two options, with a partial price reduction by the Seller and a partial “cash gap of the appraisal” by the Buyer.

4. The fourth option would be for the Buyer to cancel the transaction, as long as the Buyer still has their appraisal contingency in place.  If you are a Seller, and we receive multiple offers over your list price on your property, we will more than likely have the Buyer you select to enter escrow with waive their appraisal contingency up front during the counter offer stages.  Then, if the appraisal comes in low, the Buyer is already required to gap the appraisal with cash to close the transaction.  

5. The fifth and final option is to rebuttal the appraisal.  Our team has done this several times, and has been rather successful in doing so.  We will write up a very detailed analysis with the comparable properties we would use for an appraisal for the subject property, and also write up a rebuttal as to why any or all of the appraiser’s comps should be eliminated from the report.  Our team has won the great majority of our appraisal rebuttals.       

The bottom line is whether you are a Buyer or a Seller, you need an experienced real estate team working on your side, so when issues arise, your team has both the knowledge and experience to tackle the problem at hand.  For more information, or any additional questions you may have, please contact Danielle Whitney Moore with Team Whitney (Keller Williams Realty L.A. Harbor) at (310) 987-9103.