Home Buying: What to Do After a Low Home Appraisal

Home Buying: What to Do After a Low Home Appraisal - Quicken Loans Zing Blog If 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.


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8 Responses to Home Buying: What to Do After a Low Home Appraisal

  1. luis frias April 6, 2012 at 10:31 am #

    This is very helpful for homeowners.j nhop

  2. nelson June 11, 2012 at 1:53 am #

    Any further tips on how to effectively negotiate with the sellers?

  3. Victoria Araj June 11, 2012 at 5:00 pm #

    Hi Nelson, thanks for the feedback, maybe we have ourselves a new blog post in the works…thanks for the suggestion!

  4. Colleen July 7, 2012 at 10:41 pm #

    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!

  5. Brian November 15, 2013 at 6:30 am #

    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.

  6. Armando Orozco Salazar February 10, 2014 at 8:12 pm #

    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?

  7. Victoria Araj February 10, 2014 at 9:10 pm #

    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!

  8. BJ March 14, 2014 at 7:36 pm #

    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.

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