What Happens When the Appraisal is Low?
What is an Appraisal
A real estate appraisal is an unbiased, third party opinion of the fair market value of a property. Real estate appraisers are licensed in the state of Georgia and independent of mortgage lenders. Most appraisers are members of an appraisal management company and receive their assignments randomly based on the areas they serve.
Is an Appraisal Required
When you are purchasing a home using a traditional mortgage the lender requires an appraisal on the property to determine the value. The appraisal is used to ensure that the lender is not loaning more money on a property than it is worth.
FHA, VA, USDA, and conventional financing require an appraisal of the property showing the value to be at or above the contracted purchase price.
Independent appraisals also protect the interests of the buyer so that they can be assured that they are not paying an inflated price for the property.
Who Pays for the Appraisal
Traditionally, the buyer pays for the appraisal as part of the mortgage process. In some cases, if a second appraisal is required, payment can be negotiated with the seller.
If the appraised value is determined to be at or above the contracted purchase price, the buyer is not required to share a copy of the appraisal with the seller. Nor are they required to share the appraised value. That information will remain private, between the buyer and the lender.
What happens when the appraisal is low? Georgia’s real estate contracts allow for an “appraisal contingency”. This portion of the purchase contract stipulates a timeline for the completion of the appraisal and a course of action should the value be BELOW the contracted price.
Because the appraisal is part of the mortgage requirement, the lender orders the appraisal early in the process to allow for completion and additional negotiations, if needed.
Georgia Association of Realtors Appraisal Contingency
On the Georgia Association of Realtors contract forms the appraisal contingency on a conventional loan reads as follows:
*Appraisal Contingencies on FHA/VA/USDA loans vary slightly. Please refer to your individual contract for more information.
Conventional Loan Appraisal Contingency. In addition to Buyer’s other rights herein, this Agreement shall be subject to the following appraisal contingency. Buyer shall cause the Lender to: (a) select an appraiser to perform one or more appraisals of the Property and (b) provide Buyer with a copy of any appraisal that is for less than the purchase price of the Property. If any such appraisal is for less than the purchase price, Buyer shall within _____ days of the Binding Agreement Date have the right to request that Seller reduce the sales price of the Property to a price not less than the appraised price by submitting an Amendment to Sales Price (F713) (“ATSP”) to Seller along with a copy of the appraisal supporting the lower price. In the event that Buyer does not timely submit an ATSP to Seller, Buyer shall be deemed to have waived Buyer’s right to do so and this Agreement shall no longer be subject to an appraisal contingency.
Seller shall, within three (3) days of the date of an ATSP is delivered to Seller (but not later than two (2) days prior to Closing), accept or reject the ATSP or seek to negotiate with Buyer a lesser reduction in the sales price of the Property than what is reflected in the ATSP. If, within the above timeframe, an ATSP has not been signed and accepted by the Buyer and Seller and timely delivered to create a legally enforceable amendment, Buyer shall have an additional three (3) days (but not later than one (1) day prior to Closing) to terminate this Agreement without penalty. If Buyer does not terminate the Agreement within this timeframe, Buyer’s right to terminate due to the failure to agree to an ATSP shall be waived and Buyer shall close on the Property for the purchase price set forth in this Agreement. Nothing herein shall require Buyer to seek a reduction in the sales price of the Property.
What Happens When the Appraisal is Low
If the value assessed by the appraiser is LESS THAN the contracted price there are several options:
- Buyer can terminate the contract and retain their earnest money.
- A buyer can request that the seller reduce the contract price to an amount EQUAL to the appraised value.
- The buyer & seller can agree on a reduction of the price that is somewhere between the appraised value and the contract price. In this case, the buyer will be required to pay the difference in CASH at closing.
Should the buyer and seller be unable to negotiate and agree to a resolution, the buyer or seller may terminate the contract and the buyer retains their earnest money deposit. The seller is then free to put the property back on the market and solicit new offers.
How to Avoid a Low Appraisal
What happens when the appraisal is low? For sellers, the most common inclination is to list a property for sale at the highest possible price. However, pricing and value can be tricky for many. The best indicator of VALUE is to analyze the most recent sales in your neighborhood of homes that are most similar to yours.
Listing a home at above market value can cost you time and money. Spending more time on & off the market with lost contracts because of low appraisals gives buyers the impression that something is wrong with the house or that you, the seller, are difficult to work with. It’s better to list your home at or slightly below fair market value. This practice generates the most interest from buyers & minimizes your time on the market.
For special properties like farms, large acreages, or unique homes, a pre-listing appraisal is often very useful. You can find licensed appraisers here.
What happens when the appraisal is low? For buyers, it is important to consider that your loan is dependent on the appraised value. Although we are still in a seller’s market and multiple offers are normal, don’t get swept up in a bidding war.
Offering fair market value is always the best course of action if you want to buy a home. Above market offers can cost you money in lost home inspection fees & lost appraisal fees as well as costing you valuable time in a contract that won’t make it to the closing table.