Q: I am in the process of selling my home. The market is hot in Minnesota, and I had multiple offers over list price. Unfortunately the buyers' lender's appraisal came in under the contract price. The appraisal came in at around $275,000. We had listed the home for $280,000 and the offer came in at $290,000.
There are limited comps in the neighborhood, as inventory is low and, as you have mentioned, people are staying in their homes longer. My agent is compiling as much market data as possible to challenge the appraisal. Do you have any other advice on what to do?
A: We think you're on the right track. Your real estate agent is doing the exact thing that he is supposed to do. When there are lots of sales in a neighborhood, an appraiser has an easier time trying to come up with an appraisal amount. As you've come to see, when there is a limited number of units that have sold and the market is hot, appraisers might have a harder time coming up with a home value that keeps pace with a hot market.
You need to remember that an appraisal is not, in our view, an exact science. Appraisers that have been in business for years can tell you stories about how some property values can come in low and some can come in high. Frequently, and in most cases, appraisers hit the sales price of the home right on the mark.
There are a couple of things that could impact your appraisal from the appraiser's side. We've seen situations where appraisers have performed appraisals in markets in which they have had very little experience. In these situations, the appraisals can come in way short.
It looks to us that the appraiser in your situation is close to the amount of your purchase price but not quite there. While you might want the appraiser to say the home is worth $15,000 more than what the appraiser came in at, the appraiser might be right. But we are not appraisers and can't second guess the appraiser's evaluation of your home's value.
But what we do know is that your real estate agent also has a good pulse on what is going with real estate values. Your agent's review of the comparables may give your agent ideas of what information the appraiser might have missed. It possible that some amenities in comparables are included or excluded that affect that home's value and ultimately the amount of the appraisal.
In limited cases, the buyer's lender may send out a second appraisal to get an additional opinion to get things through.
The reality is that if your buyer wants your home, the appraiser's value is quite close to the price you and the buyer agreed to. The buyer can use the appraisal to negotiate a reduction in the purchase price, but in a hot market another buyer may be willing to buy the home even when the appraisal is a bit low, and the second buyer will do that by putting more money down in cash.
Here's how it might work: Buyers have a certain amount of money that they can put down toward the purchase of a home. If a buyer agrees to purchase a home for $200,000 and is getting an 80 percent loan for $160,000, then the down payment of 20 percent comes to $40,000. If the appraisal comes in at $190,000, the lender will still give the buyer an 80 percent loan, but 80 percent of $190,000 is only $152,000. The buyer would have to put down $48,000 in order to proceed with the closing.
If the buyer has the $8,000 to put down and wants the house badly enough to put down the extra cash, the deal can move forward.
In situations where the buyer doesn't have the extra cash to put down, then the deal might die. You'll need to evaluate how badly the buyer wants to buy the home, how badly you want to sell, whether your real estate agent is able to get more information to the appraiser to have him or her up the amount of the appraisal, and if there are other buyers waiting in the wings.
Good luck with the sale and move.
(Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through her website, ThinkGlink.com.)