What if your home doesn’t appraise for the selling price?
NOTE: (5/7/09) This post is from about a year ago. As of 5/1/2009 there is a new “wrinkle” in the appraisal process which you should also read about. It is the Fannie Mae / Freddie Mac Home Valuation Code of Conduct. Read about it HERE.
This is a question that is coming up all too frequently these days. Here’s how it happens.
You and your Realtor agreed upon an initial list price when you first put your home on the market. Assuming you listened to your Realtor’s advice and priced it properly, it should sell within a reasonable amount of time. If it does, then the comparable listings or “comps” that an appraiser will use in determining the value of your house at the time of sale will likely be in line with the comps that the Realtor used when you listed.
The challenge comes when one of two things happen.
- You added a “fudge factor” to the listed price so you’d feel better about negotiating. In other words, the “right” price should have been $100. You decided that this number is your bottom line so you insist on listing for let’s say, $110. Then you happen to luck out because the buyer fell in love with your house and your Realtor negotiated a selling price of $107. Great, right? Well- maybe, maybe not. When your buyer goes to get a mortgage, his lender will order an appraisal. The appraiser will look at recent comps and he might just come up with, oddly enough, $100 as the value. So your house is appraising at about 7% lower than what it sold for.
- The second scenario happens when you home does NOT sell quickly. Let’s use our $100 house again. You list it at $104, which is much more reasonable and 9 months later you sell it for $102. The appraiser now comes in and looks at recent comps. In today’s market, “recent” may only extend back 60 days. In a depreciating market that we’re in, the house may now only appraise at, let’s say $96 which about 6% lower than what it sold for.
So — what happens then?
There are two possible problems.
- The lender may not want to make the loan.
- The buyer may not want to pay the price because he is being told that the house is not worth what he paid.
The lender’s decision as to whether to ignore the low appraisal will usually be based on the size of the down payment the buyer has compared to the value of the house. This is called “loan to value” or LTV ratio. The lender is primarily concerned with their ability to recoup their investment if the buyer defaults for any reason. If the buyer’s down payment sufficiently offsets the difference between purchase price and appraised value, the lender may be satisfied and still make the loan.
Even if that does happen, the buyer may take a hard stance and say that he is not willing to pay the price because it is over market value and doesn’t want to get stuck with a house that is not worth what he paid. If this is the case, you may have to renegotiate at this point in order to make the deal work. You can lower your asking price, offer to pay some or all of the closing costs, or make some other concession to the buyer, like giving a credit for new flooring or driveway or something else. Depending just how badly the buyer wants or needs the house, you may not have to make up the entire difference, just some of it.
The best way to avoid this happening is to price your house properly at the outset and to keep the price in line with market value if it doesn’t sell for a while. Your Realtor should be working with you throughout the length of your listing agreement to keep you apprised of changes in value. Listen to your Realtor.