What Happens When the Bank Appraisal Comes in Low?

“Low appraisals” aren’t a problem to deal with in what is most commonly known as a “sellers market”; a real estate market in which there are more buyers than sellers.  In this type of real estate market, this often causes multiple offers to be presented on some houses for sale, which in turn, causes prices to rise.

Yet, at some point in the real estate market cycle, the economy changes and the real estate market begins to balance itself out.  A "balanced market" is also known as “normal market”; one in which there are enough houses listed for sale to satisfy buyer demand.  A “normal” or "balanced" real estate market is a prelude to a “buyer’s market”. 

A buyer’s market is a market phenomenon in which there are sufficiently more houses for sale than are buyers at that point in time.  Buyers have multiple choices of houses in a certain area and price range.  It is in this type of real estate market that low appraisals can surface.

Low bank appraisals occur less than 8% of the time, statistically.  They occur for reasons which include a changing real estate market, changing economic factors of a neighborhood or initial improper pricing. 

Most sellers and buyers of real estate believe that a bank appraisal that comes in low, is one in which comes in below the contract price.  It’s important to understand what the bank appraiser’s objective is when appraising a property for a lender. 

What can be done if the bank appraisal comes in low?  The answer to this question depends upon ones’ point of view.  

It’s important to realize, that, in a real estate transaction there are two contracts:  One contract for the purchase and sale of a property which exists between the buyer and seller; the other contract is between the bank and the buyer.  The terms and conditions of one contract cannot be imposed upon the other. 

In the circumstance of a low bank appraisal, the seller may undertake the position that the issue in question is the buyer’s problem to correct, in some manner.  The buyer may undertake the position that the purchase and sale contract may have a mortgage contingency, in which case, if the bank appraisal comes in low, the mortgage lender would not grant a mortgage commitment, therefore, the transaction may not move forward.  A low appraisal has the great potential of being a dense issue to consider.

Equally important to realize is what the obligation of a real estate bank appraiser is to establish market value.  In truth, the bank appraiser does not have to appraise the property to establish market value.  The bank appraiser must complete an appraisal to ascertain whether there is enough market value to support the mortgage balance.  For example, if a buyer signed a purchase and sale contract to buy a property for $100,000 and mortgage $50,000, the bank appraiser, technically, could appraise the property for $50,000, thus meeting the lenders requirement.  It's important to understand that the real estate appraiser is working on behalf of the mortgage lender, not the buyer.    

What happens if a bank appraisal comes in low?  Some lenders will not order a second appraisal unless there is reason to believe the appraisal is grossly incorrect.  In practice, generally, there are several options.

1.     The buyer can make up the difference between the appraised value and the purchase and sale contact price.

2.     The seller can make up the difference between the appraised value and the purchase and sale contact price.

3.     There is a renegotiation between the buyer and seller which is shepherded by their respective real estate professionals. 

Very few real estate transactions fall through because of a low bank appraisal. 

If you are concerned about a low bank appraisal, or have questions or concerns you’d like to address, feel welcome to click the “Contact Me” button below