Low Appraisals in a Hot Sellers’ Market

In today’s very strong real estate market, home prices continue to appreciate at a quick pace. Quickly rising home prices coupled with low housing inventory have created special concerns regarding home appraisals.

The appraisal contingency is a standard home sale contingency that allows home buyers to back out of the contract if a home is appraised for less than the purchase price. When an appraisal comes in low, it is commonly known that the buyer needs to “make up the difference” between the appraised value and the purchase price in cash in order for the bank to approve the loan. Appraisals are heavily influenced by recent comparable home sales in the neighborhood (usually up to 6 months ago). In today’s real estate market, where home prices are increasing quickly each month, and there are few if any true “comps,” or comparable sold homes, a sale from six months ago may not correctly reflect today’s fair market value, causing homes’ appraised values to come in significantly lower than the agreed purchase price. What does this mean for buyers and sellers?

For buyers, this means most offers submitted and accepted in today’s market will waive the appraisal contingency. Because the market is so competitive, buyers will waive their right to back out of the contract based on a low appraisal because 1) if the buyer doesn’t waive the appraisal contingency, the seller will likely choose a different offer that does waive it, and 2) the buyer is willing and able to make up the difference in cash. In a competitive multiple offer situation, waiving the appraisal contingency will be the norm and almost a prerequisite to having an offer accepted. It is crucial for buyers to communicate with their lenders about the implications of waiving the appraisal contingency before submitting an offer, so that they are fully aware of how a low appraisal will affect their ability to get the loan. In certain circumstances, a buyer will not always have to “make up the difference” in cash, even with a low appraisal. Clear communication with your lender and real estate agent is key.

For sellers, the low appraisal trend means that sellers should be extra careful about reviewing buyers’ cash reserves because if the home appraises lower than the purchase price, the buyer may need to make up the difference in cash (and may not get the loan if they can’t). Buyers who can demonstrate the ability to overcome a low appraisal, such as buyers who have a high down payment, or sufficient cash reserves in addition to the down payment, are strong buyers. In addition, sellers’ agents who are knowledgeable about past and pending sales in the neighborhood will be better equipped to skillfully present a home’s value to appraisers, as well as rebut extremely low appraisals.

If you have any questions about the appraisal contingency, whether you are a buyer or a seller, please reach out at any time. Shirley Hwang (310) 701-3346