Low Home Appraisal, Now What?
Sounds like a strange or head-scratching topic for San Francisco and Bay Area buyers or homeowners, but it has been popping up in various markets. Regardless of whether it’s a purchase or a refinance loan, a lower-than-expected appraisal can happen and certainly has impact on your transaction. As of late in our Bay Area markets, there has been sales data and metrics that have caused many appraisals to come in just short. So what are the options when that happens and is this a trend??
On the second question, I don’t feel it is. Often times, one quarter of slightly less intense activity can have a lag effect on housing data and ultimately valuations. This outlier of a quarter can be due to many things - higher interest rates, spooky economic data, slower hiring, higher gas prices, flattening wages, are all just a few.
So back to your options: and they vary based on whether you are buying a home or refinancing your own.
REFINANCE
This I have been seeing sporadically, but it still gives reason to understand it well enough to know that you have options. First, you can appeal the appraisal. We have done this for many clients this year by researching other sales data that could have been included in the report to help the valuation. There is also the option of ordering a whole new appraisal, but this comes with the additional cost of doing so. If doing a cash-out refinance, you may have to reevaluate and take out less cash than originally planned so that the deal can still work. However, in the event you are not pulling out cash and were simply looking to lower your rate, you might be faced with having to bring in cash (or a “cash-in” refinance) in order to wrap up your transaction and make it work.
Of course, there is always the option of canceling the refinance and putting it off until a later time where the factors line up better for you. The downside here is that you will have to pay for a new appraisal at the time of picking the refinance back up.
Why is this becoming common? Many reasons, but the simplest one here in the market is that many homeowners will overestimate the value of their own home, thus setting unrealistic expectations for a refinance.
When it comes to a purchase transaction, the outcomes and solutions begin to narrow. Again, this is not uncommon in our market(s) today, and there is ALWAYS a solution somewhere in the deal amongst the parties involved.
PURCHASE
In the event you are locked into a sales/contract price and the appraisal comes in short of that mark, the first avenue to pursue would be to negotiate a new/lower sales price on the home. While many sellers in this current market are not willing to do so, there are instances in where parties will “split the difference,” meaning that the seller will come down in price to some point and the buyer will bring in some additional funds to make the deal work. Buyers can also simply increase the down payment/cash involved to meet the down payment minimums and ensure the deal still pencils out. There is also the option of disputing the appraisal, similar to a refinance, but this can take up time and that is often not a luxury when you are in contract on a new home purchase. Finally, if all other options have been exhausted and there opportunity to exit without losing your deposit is there, you can simply cancel the contract and move on from the home to try again elsewhere.
Homes are often mis-priced in today’s market, so this is becoming more and more common. As a seller, it is possible that your agent listed your home too high in price and that is why you are in this position. Your options at that point can be to either wait until a new comparable sale has recorded and can support your higher price level, or simply lower the price/negotiate with the buyers to meet in the middle somewhere.
Plenty of options and solutions out there for this now prevalent occurrence in our market, but it is always advised that you know your options in advance so that you are ready and have a plan in place no matter where the appraisal comes in.
Email me anytime to learn more on this topic or others pertaining to home values and how it affects your transition.