Home Buying: What to Do After a Low Home Appraisal - Quicken Loans Zing BlogIf you’re in the process of buying a home, you know that it’s rough out there. If you want to buy a home in this market, it takes more than a down payment, decent credit score, and patience. It takes becoming almost an expert in your market and having strong negotiating skills.

Think I sound a little harsh? Yes, maybe a little.

If you’ve read some of my last posts, you’ve heard about my recent plans to buy a home. In fact, we actually did find the perfect home for us! Everything was going great, even the inspection, until the appraisal was done. Want to know what happened? Well, the home was appraised approximately $30K lower than the offer price.

Why does a home appraisal come back lower than expected?

Some lenders are using Automated Valuation Models (AVMs). These are statistically based computer programs that use real estate information such as comparable sales, property characteristics, tax assessments and price trends to give an estimate of value of a property. This method helps make the loan process go faster and reduce costs.

However, AVMs are not helpful in most situations, especially in today’s market. For instance, in the neighborhoods we’ve been looking into, home prices have been increasing somewhat quickly. An AVM by itself, without a traditional appraisal, would actually undervalue a home, because it would use recent home sales in the same neighborhood. Also, an AVM can’t truly inspect your home

The good news is that Quicken Loans does not use AVMs. Our mortgage banker ordered a traditional FHA appraisal, which means that an independent appraiser approved by HUD (Department of Housing and Urban Development) came to check out the property in person.

Unfortunately, all the upgrades that the owners had done in the home didn’t impact the value of the home as much as we all had anticipated, and our appraisal came back much lower than expected.

Normally, you’d say, “That’s great! You can negotiate a lower price!” Unfortunately, this isn’t always true.

Since we’re doing an FHA loan, we thought that we were going to be ok, and the purchase would go through. According to FHA guidelines, once an FHA appraiser appraises a home, this appraisal stays tied to the home for four months. In other words, the appraisal expires 120 days after it was done. What this means is that if the sellers don’t agree to sell the home at the appraised value (to us) and decide to put it back in the market, they will most likely not accept offers from buyers with FHA loans because a lender won’t approve a loan for anything higher than the appraised value. Since in this market, most buyers are FHA buyers, this limits the pool of potential buyers.

Also, since the gap between the appraisal and our offer price is so large, the sellers decided not to lower the price. We decided not to offer anything more than the appraised value, and we’ve all moved on. After all, we didn’t think it was wise to put more money out of our own pockets toward something that was overpriced to begin with. Needless to say, we were very disappointed.

What to do after a low home appraisal

If you’re going through something similar, let me give you a few scenarios of what you can do after a low home appraisal:

  1. Appeal the appraisal – This is something we decided to do since we really love this home we have the offer on. We’re hoping that if our appraisal is reviewed, and the house is given a higher value, it’ll be easier to negotiate with the sellers.
  2. Negotiate with the sellers – Whether you choose to appeal the appraisal or not, you can always try to negotiate with the sellers. If the gap of the offer price and the appraised value is not too large, you may be able to meet somewhere in the middle and get your dream home.
  3. Move on – Sometimes deals just fall through. Even though we really love this home, we’re not willing to put more money out of our pockets to buy a home that is overpriced. So, we’re preparing ourselves to walk away from the deal and continue our home search. There will always be another home…
  4. Keep your eye on the house – A lot of times, if a deal falls through because of appraisal issues, the homeowners have a hard time getting higher offers from other buyers (because of the FHA appraisal stays with the home for four months) and therefore, may come back to you to negotiate again. In other words, keep looking but also keep an eye on the home just in case the sellers don’t get any more offers.

I hope that sharing my home purchase experience so far is helping your home buying experience. Even though there can be rough patches along the way, buying a home is still a goal for us, and we know that in the end, it will all be worth it. Our Home Loan Experts are here to help ease the process.

 

Related Posts

This Post Has 12 Comments

  1. @ author & daryl: “We decided not to offer anything more than the appraised value…” Wait. You ALREADY DID offer more than the appraised value. In fact, your OFFER was the reason the seller chose to allow YOU to tie up their property for 30+ days to purchase it instead of someone else. What you are really doing is reneging on the price you offered to pay because of the opinion of someone else, an appraiser. If you liked the home so much to be willing to pay that price when you submitted your offer, why are you not willing to pay it now? Unless you really can’t make up the difference because of lack of funds, I think that’s a bit dishonest in my opinion. And by the way, daryl, as a Realtor for over 10 years, new paint and flooring DOES in fact make a home worth more. That’s why buyers fall in love with those homes and they get flooded with higher “offers”. The fact is, most people aren’t and don’t want to be handymen to work on a project house. That’s why those things add value, meaning the price people are willing to pay rather than the square-footage comparables from an appraiser just trying to get another job done as fast as they can.

  2. Was googling what to do when the appraisal comes 30K below the offer price and the search led me to your website…I feel so much better after reading your post!

  3. @BJ. I am currently awaiting appraisal on a home I am buying. I qualify for the full amount. I also have 50% More to put down in addition to the full loan. If the appraisal comes back to low, it would be retarded for me to pay 10 grand above the appraisal. If the seller is anything like you, and doesn’t negotiate, I will walk away.

    Why would I spend 10 grand when I could buy a house for much cheaper and spend that money to make it my own. Many times, things that people think will make their house more appealing, are just surface coverups. Putting in hard wood and painting aren’t gonna add that much value. Adding extra square footage, restructuring, and additions are about the only things that will add tens of thousands of dollars to a home.

    For my situation, the seller has his home 20 grand above the price of comps in the area. They claim the repainted original house cabinets, refinished hard wood floors that creak, and a a large sheet rocked basement with tiled floor as the reason for the 20000 dollar price increase. They added an extra 700 sq feet to the house, and cooled it by cutting a vent into the existing duct work. Lol. I know on inspection, the HVAC unit won’t be big enough to cool the home. In addition, their isn’t any windows down there. This can not be included in the price as extra footage. Thus I think they will be in for a shock. Comparable also have hard wood floors under carpet, so that point is mute.

    Painting doesn’t add any value, anyone can paint.

  4. I will no longer deal with buyers who have to get full loan approval from the bank. They are a waste of time. I am like the other person who commented here who has so many upgrades and high quality construction…etc. I am not selling my home based on an appraisal. If the buyer does not see value in all of the extras and nicer quality things, then they need to be looking for basic cookie cutter homes.

    Why waste a seller’s time making and accepting an offer when you have no cash to put on the table to make up the difference when you know the appraisal is probably going to come in low. Don’t ask me to lower an agreed upon price because you can’t qualify for your loan.

  5. Seller and I agreed on a sales price, the appraised value came 11k lower I suggested the seller to meet in the middle, ill come out with an extra $5500 and he will lower the sales price the same amount if he refuses is there anything else I can do?

    1. Hi Armando, thanks for reaching out to us. I’ve shared your question with one of our home loan experts who will contact you to learn more about your situation. Thanks and have a great day!

  6. Other than the misguided blather about AVM’s, good article.

    AVM’s are unbiased calculations that can be extremely helpful in assessing value. First, contrary to what is insinuated here, no lender ever made a sole decision on a purchase money transaction using only an AVM. Since 2010, FFIEC guidelines prohibit it. That said, 100 appraisers will come up with 100 opinions of value, and 100 realtors will create 100 different comparative market analyses. Appraisals will often include out of area comps, values reflecting a general understanding that a history of conservative valuations will likely find them on a “less preferred list”, etc. An AVM, if it incorporates the right kind of support data and functionality that allows it to consider both MLS data and public record data, is both current and unbiased and when used with an Inspection according to FFIEC guidelines a very great TOOL that should not scare a consumer if they encounter it. Of course, a bad AVM, like a bad appraiser, can also be problematic.

  7. I’m on the other side of this problem. We listed our house in mid june for $435 k (CA) within 8 days we had 2 full price offers. After a couple of weeks and a glowing inspection, the appraisal happens. Guess what? It comes in 30k below the offers/asking price!! We see that one of the comps has bad info (not 3200 sq feet but really 3000 sq feet) so that was a $6500 mistake that hurt our appraisal. The county had bad info on this house as well. Anyway, our house is maintained to the max by my hubby..we have TONS of upgrades and amazing extras where the appraisal has no category for such as a 130 foot paved by 25 feet wide and gated RV access – enough room for a Winnebago (huge) plus a Giant ocean worthy boat…zero credit for this on the appraisal form. Plus we had nothing but short sales and REOs that we were compared with..not fair. Other people neglect their home and we spend all weekend maintaining but in the end those nasty ones are considered “comparable” properties? No way, Jose!!! We have all these extras: fire pit, gazebo, newly painted home, hardwood floors, storage shed, wetbar and custom bookcase and closet in 600 sq foot gameroom above our 3 car garage.. We have workbench in 3rd car shop area, extra driveway in front of home that fronts the RV gated access. We have top of line whole house fan plus 3 zoned a/c heating system plus fountain in backyard plus low maintenance patio cover, spa (hot tub) plus gunite built in pool that’s 36×18 with diving board and 9.5′ deep. We have prof landscaped yard (beautiful) and backs partially to golfcourse (we hear FORE a lot and carts going over wooden bridge) We have quiet peaceful backyard. Sorry for the rant but we have dropped our price $7k solely because of the appraisal hat we feel is NOT comparable. Frustrating!!! We may lose sale but we have backup offer to start clock ticking again (new appraisal etc) both were conventional loans… Bummer. Meanwhile we have a purchase contract on another house. We might be able to continue with other assets but not real happy about 2 mortgage pmts till we sell this one..UGHHH my thoughts are that appraisal is bogus. It merely tries to equalize distressed and non distressed properties so this blogger is not Paying for Overpriced property. She’s trying to get well kept property at distressed pricing. Well maybe her lender is preventing he from buying it at its true value. In econ i learned that market price is the point at which a willing buyer and willing seller agree to buy and sell a property. Not so anymore with appraisers in the mix. I saw a bill in congress not passed yet which prevents appraisers from using distressed props in appraisals for non distressed props. That’s one bill i hope passes!

Leave a Reply

Your email address will not be published. Required fields are marked *