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:
- 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.
- 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.
- 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…
- 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.