What happens if you buy a house and the appraisal comes in at a lower value?

You are excited, you finally found your family’s dream home then you get a call from the mortgage broker or bank saying the house has been appraised at a lower amount.

Now what?  What happens if you buy a house and the appraisal comes in at a lower value? Depending on when you are seeing this video and the market conditions you are buying in. Let’s look at each market condition:

Sellers Market

Buying in a hot sellers market you bought your family’s home in multiple offers and had to compete against other buyers. Here is what you need to do:

Larger downpayment. For example, if the house you bought is at 2 million and the appraisal came in at $1.9 million, the bank will lend up to 80% of $1.9 million. You will need to come up with the difference of $100k. In a strong sellers market where you are competing against other buyers, it is good to have a larger downpayment to cover any potential difference in appraised value.

Here is top secret tip: In a sellers market, it’s good to have the bank appraise the property as close as possible to the closing date since property values are rising. For example: if you bought the house on October 1st and it’s not closing till Jan 1st, in a rising value market, completing the appraisal as close as possible to the possession date is best.

Buyers Market

Ok, now let’s look at buying in a buyer’s market where you can negotiate the price, put conditions, you know just like how real estate should be.  You have two options here:

1. Put a condition on financing. You’ll need to have the mortgage broker or bank order the appraisal ASAP. 4-5 business days turnaround is reasonable. If the appraised value comes in lower, your agent can have a discussion with the listing agent to see if a compromise on the purchase price can be negotiated. 

2. Larger downpayment: Again in this case having a larger downpayment will protect the buyer by covering the shortfall

Here is a top secret tip: In a buyers market, it’s good to have the appraisal done ASAP to protect from declining market values. In this case if you have a closing date of 3 months, you don’t want the appraisal completed close to possession date as there might be a risk market conditions worsen and the house gets appraised at a lower value.

To summarize, let’s look at the sellers and buyers perspective. If you are seller you want a firm offer with no conditions, larger deposit with the offer and a shorter closing date as opposed to 120 days. Also, pricing the house appropriately based on market conditions is important to avoid issues come closing time.

If you’re a buyer, cash is king and understanding market conditions are important when deciding what to put into the offer from conditions, closing date, deposit and price.

Until next time…..happy home hunting!!