An appraisal is an unbiased professional opinion of a home’s value. The appraisal assures the lender that they aren’t handing the borrower more money than the home is worth and that you are not overpaying! Appraisal negotiations take place when the home is appraised below the contract price.
Lenders want to make sure that you are not over-borrowing for a property because the home serves as collateral for the mortgage. If you should default on the mortgage and go into foreclosure, the lender will sell the home to recoup the money it lent. The appraisal helps the bank protect itself against lending more than it might be able to recover in this worst-case scenario.
Yay, the house appraised: If the appraisal comes in, at or above the contract price, the transaction proceeds as planned and appraisal negotiations can be avoided.
Oh, no, the house didn’t appraise: If the appraisal comes in below the contract price, there is a chance for appraisal negotiations. Chances are neither you nor the seller wants the transaction to fall through. As the buyer you have an advantage, in that a low appraisal can serve as a negotiating tool to convince the seller to lower the price. Here is how to negotiate with a seller after a low appraisal:
Did you have an appraisal contingency? Does your loan depend on it? Talk this through with your agent/lender first to use it as leverage.
If the gap between the offer price and the appraised value isn’t too large, you may be able to meet somewhere in the middle. Consider writing a letter to the seller expressing your interest.
Most lenders will allow you to pay the difference in price outside of your loan out of pocket, or you might re-evaluate and reduce your down payment percentage.
Sometimes deals just fall through. Even if you really love the home, be smart and don’t buy an overpriced property. Always be prepared to walk away.
Keep your eye on the house. If a deal falls through due to appraisal issues, homeowners struggle to get higher offers and may return to negotiate with you again.
If you think the appraisal was unrealistic, ask your loan officer to compose a rebuttal with help from your real estate agent.
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