After settling on a list price, weeks of marketing, and finally negotiating an offer on your house you’ve been told that you got a low appraisal. What the heck, now what?
First, let’s start by chatting about the three different types of value that are placed on a property; assessed value, market value, and appraised value.
- Assessed Value is the value assigned to a property for tax purposes. Compare Oklahoma Tax Rates Because we all want to pay as little taxes as possible, we tend to like this number on the low side.
- Market Value as defined by Fannie Mae is the most probable price a property should bring in an open market. In other words, what a buyer is likely to pay for a house.
- Appraised Value is the opinion of an appraiser based on location, condition, and improvements during the mortgage process. It is for the lender and paid for by the buyer.
It is possible that you can have a different amount placed on your property for each type of value. For example, the tax assessor may value a home at $185,000 (assessed value) while a prospective home buyer may offer to pay $225,000 (market value) only to receive a low appraisal report of just $218,000 (appraised value).
When a property receives a low appraisal the buyer and seller are left with only a few options.
- The Oklahoma real estate purchase contract protects the buyer in this situation. In the event a property does not appraise for the contract price, the buyer may cancel the contract and receive their earnest money back.
- The seller can agree to cut the sales price to the appraised value if they can afford to sell at that price. This will mean a change in net funds received at closing or possibly an amount due from the seller at closing.
- The buyer can agree to bring the difference in funds to closing. This happens most often in new construction when homebuyers make too many upgrades during the build. Read more about that here A word of caution, this could lead to negative equity at the time of purchase which can take time to crawl up from. Not recommended especially if you plan to live in the home for a short time.
- The buyer and seller can split the difference, each taking a hit. The seller reduces the price a bit and the buyer brings more to closing.
- The bank may be swayed to allow a second appraisal. However it is costly and does not always get the result all parties are hoping for.
Pro Tip: government appraisals (on FHA, VA, or USDA loans) are given a case number assigned to the property address and have a shelf life of 180 days. So, a low appraisal on a FHA loan will stay with the property for six months. If the deal busts, the appraisal will be the SAME for the next buyer with a FHA loan.
Getting a low appraisal when you’re selling your house stinks. There’s no other way to put it. If it happens to you, it’s likely that you will either have to cut the price or not be able to sell now.