If you’re in the process of selling or buying a property, there’s always a possibility of the appraisal coming in lower than the asking price. But what happens next? It’s natural to be concerned about what this could mean, but there are steps you can take to navigate this situation. Here’s what you should do if your appraisal comes in less than the asking price:
While getting an appraisal that is lower than the sale price may be disappointing, it is not always the end of the world. By following these steps, you can find ways to make the transaction work for both parties and still get the deal done.
Understanding Property Appraisals
Before we delve into the impact of low property appraisals and what you can do when you find yourself in such a situation, let’s take a step back and understand what a property appraisal is.
A property appraisal is the evaluation of a property’s worth based on various factors such as location, age, condition, size, and comparable properties in the area. Appraisals are typically conducted by licensed appraisers who provide an unbiased estimate of a property’s market value. This figure is crucial in real estate transactions as it helps buyers determine how much a property is worth relative to its asking price.
It’s important to note that property appraisals are not the same as inspections. Inspections look into the condition of the property to identify any underlying issues that may affect its value or pose safety hazards. Appraisals, on the other hand, purely focus on determining a property’s market value.
The Selling Process and Appraisals
When selling a property, an appraisal is usually conducted by the buyer’s lender. Lenders require appraisals to ensure that the property they’re providing a loan for is worth the amount being asked in case the borrower defaults. The appraisal amount also determines how much the lender can loan the borrower.
After the appraisal is conducted, the lender provides the buyer with an appraisal report. If the appraised value is less than the agreed sale price, it can impact the financing process.
The Impact of a Low Property Appraisal
A low property appraisal can have far-reaching consequences in a real estate transaction. If the appraisal value is lower than the sale price, the buyer’s lender may decline to finance the purchase, or they may only lend up to the appraised value. The buyer then has to pay the difference either out of pocket or renegotiate the sale price with the seller.
A low appraisal can also lead to delays in closing the sale as parties negotiate a new price or explore alternative financing options. In some cases, a low appraisal can completely derail a sale.
It’s important to note that a low appraisal does not necessarily mean that the property is not worth the asking price. Appraisals are a subjective measure of market value, and different appraisers can arrive at different figures.
What to do when an appraisal is less than asking price
If an appraisal comes back lower than the asking price, there are a few options available to both buyers and sellers. These include:
Negotiate the price – The buyer and seller can renegotiate the sale price based on the appraised value. The seller can either agree to reduce the price, or the buyer can cover the difference out of pocket.
Challenge the appraisal – If the buyer feels that the appraisal values the property lower than its worth, they can challenge the appraisal by providing additional evidence to support a higher value. This can include recent renovations or upgrades, improvements to the property, or data on comparable properties that sold for a higher price.
Renounce the sale – If the buyer cannot secure financing, they may have to renounce the sale. This means that the buyer walks away from the sale, and the seller is free to look for other buyers.
Renouncing the Sale: What it Means and How to Do it
Renouncing a sale can be a stressful and emotional experience for both buyers and sellers. If a buyer renounces the sale, they may lose their deposit or face legal action from the seller, depending on the terms of the purchase agreement.
To renounce a sale, the buyer typically has to provide written notice to the seller and their agent. This notice should include the reason for renouncing the sale and any applicable documentation such as the appraisal report or loan denial letter.
If the seller agrees to terminate the sale, they may have to return the buyer’s deposit, minus any applicable costs or penalties. If the seller does not agree to terminate the sale, the buyer may have to pursue legal action to recover their deposit.
Avoiding Low Property Appraisals in the Future
While appraisals are a subjective measure of market value, there are steps you can take to avoid a low appraisal in the future. These include:
Price the property accurately – Ensure that the asking price of the property is aligned with its market value. Working with a real estate agent can help you determine an appropriate price range.
Make improvements and upgrades – Improvements to the property such as new flooring, updated appliances, or fresh paint can increase its value.
Provide information to the appraiser – Providing the appraiser with documentation on upgrades, renovations, and comparable properties can help them arrive at a more accurate appraisal value.
Working with a Real Estate Agent to Navigate Appraisals
Real estate agents can be a valuable resource when navigating property appraisals. They can provide valuable insights into local market conditions, advise on pricing strategies, and help buyers and sellers understand the appraisal process.
When working with a real estate agent, be sure to ask about their experience with appraisals and how they can help you navigate the process. With the help of a knowledgeable agent, you can minimize the impact of a low appraisal and ensure a successful real estate transaction.