Home purchase/sale when appraisal comes in low

[Susie]

We're in contract to buy, and are listing our house for sale next week.  I'm starting to have anxiety about the appraisals for both transactions.  We're in a market where sale prices are suddenly sky high due to lack of inventory.  I know we're paying high on our purchase, but I'm ok with it because we'll sell high too, plus I locked 2.875% for 30 years for the mortgage, which makes it easier to swallow.

My worry is the appraisals w/r/t financing.  We're only planning to put 5% down at the time of our purchase, because we will not yet have sold our current house, and we have equity tied up in it.  (After we sell we will put the equity into the new house, recast, and drop PMI.)  Contract price on the purchase is $450k.  Zillow (FWIW) estimates the property is worth $430k, which was the asking price, and which I think is fair.  Another house, same style/same side/same street/same lot size, closed for $430k in February. 

We're prepared to bring the extra $20k to the table to make up the difference between value and contract price, so we can make 95% LTV even if it appraises around $430k, but there's a limit to how much further we can go, if the appraisal comes back lower than $430k.

On the other end, on our sale, the same thing is happening.  As of Feb, our agent recommended listing around $280-290k.  She revised that to more like $300-320k based on current market conditions.  A fairly similar house on our street was asking $330k and just went under contract (price unknown).  I'm not at all worried about getting a sale contract at that price point.  But I worry that our buyers will run into the same problem I'm worried about for us.

Basically, prices inflated so steeply and so recently, that appraisals would come in much higher if you look at pending properties than at sales only 6-12 months ago.  

Has anyone else bought/sold under similar conditions and have any calming advice?  This whole process is so stressful.

[ny96]

I can’t remember what Zillow valued our house at when we purchased it 2 years ago, but we paid 110k over asking and it appraised at the purchase price. We lost a bidding war on a previous house that went for way more than the Zillow estimate, and after it sold the Zillow estimate matched the purchase price even though it was much higher than most other homes in the neighborhood. Our Zillow estimate matched our purchase price as well after we bought. I don’t put a huge amount of stock in Zillow estimates right now.

[Susie]

The Zillow estimate is really kind of beside the point, so forget I even mentioned the Z-word. It was just a convenient shorthand. To express more concisely what my concern is, recent sales on the specific street where we are buying include:

10/2020 - $380k, couple doors down, similar lot.
12/2020 - $401k, across the street, smaller lot.
02/2021 - $412k, across the street and a couple doors down, smaller lot.
02/2021 - $430k, a few doors down, similar lot.

The ones with "similar lot" are >0.5 acre and have no back neighbor. The ones across the street are a lot less desirable, more like 0.3 acre and have back neighbors. The houses themselves are all pretty comparable.  You can see values are sharply trending up just in the last 6 mo.

I think the two Feb 2021 sales accurately reflect value of the respective smaller/larger lots, and the $430k sale is the closest available comp.  But I'm worried about that $380k price last fall dragging it way, way down.

In the neighborhood where we are selling, no closings have occurred yet since values shot up, so same concern.

[Pom]

It is so stressful. I am sorry this is a worry. I am concerned about our pending house sale as well.

We have been in this situation before and it takes a bit for available comps/appraisals to catch up with a hot market. It's just an unfortunate circumstance and it is also somewhat dependent on the appraiser. We walked away from a house we built 9 years ago because we had paid for upgrades OOP and the house still failed to appraise. The (mass market) builder would not come down and we walked. It sucked but we did find a better house eventually. You can sometimes get the seller to meet in middle, but you just have to set the limits as the buyer and seller that you feel comfortable with...

Sending you good house buying and selling appraisal juju.

[carrierroe]

Lurker here. I’m in real estate and the same dynamic is happening in my market. Hopefully the appraiser will apply some kind of market appreciation factor when comparing and applying value to your subject property. If they don’t, and it’s at a detriment to either deal, I’d ask for a reconsideration. How this works is you take the annual market appreciation divided by 12 and apply that to the months it’s been since comps have sold. Bottom line, be critical when reviewing the appraisal to ensure they haven’t made any errors. I hope it all works for you!

[acr]

Apr 7, 2021 9:34:14 GMT -5 Susie said:

We're in contract to buy, and are listing our house for sale next week.  I'm starting to have anxiety about the appraisals for both transactions.  We're in a market where sale prices are suddenly sky high due to lack of inventory.  I know we're paying high on our purchase, but I'm ok with it because we'll sell high too, plus I locked 2.875% for 30 years for the mortgage, which makes it easier to swallow.

My worry is the appraisals w/r/t financing.  We're only planning to put 5% down at the time of our purchase, because we will not yet have sold our current house, and we have equity tied up in it.  (After we sell we will put the equity into the new house, recast, and drop PMI.)  Contract price on the purchase is $450k.  Zillow (FWIW) estimates the property is worth $430k, which was the asking price, and which I think is fair.  Another house, same style/same side/same street/same lot size, closed for $430k in February. 

We're prepared to bring the extra $20k to the table to make up the difference between value and contract price, so we can make 95% LTV even if it appraises around $430k, but there's a limit to how much further we can go, if the appraisal comes back lower than $430k.

On the other end, on our sale, the same thing is happening.  As of Feb, our agent recommended listing around $280-290k.  She revised that to more like $300-320k based on current market conditions.  A fairly similar house on our street was asking $330k and just went under contract (price unknown).  I'm not at all worried about getting a sale contract at that price point.  But I worry that our buyers will run into the same problem I'm worried about for us.

Basically, prices inflated so steeply and so recently, that appraisals would come in much higher if you look at pending properties than at sales only 6-12 months ago.  

Has anyone else bought/sold under similar conditions and have any calming advice?  This whole process is so stressful.

 We're closing Friday on a home where we waived appraisal. In the end, it appraised 5k under our offer price, which was such a relief. 

It's a stressful gamble FOR SURE. Will we need to come up with $100k or nothing? who knows! 

[acr]

FWIW, when I talked about it with my lender after our offer was accepted, she told me that she'd seen very few in our market come through with huge gaps between offer & appraisal value. It may be worth asking about that to get a sense for your market.

[icedcoffee]

I would really try not to worry about this. I think in general appraisals are coming back higher to account for this. I really think you'll be ok. And if it does, the seller may need to come down a bit. There are a lot of options if it does happen so I'd try not to put the cart before the horse.

[lessel]

Apr 7, 2021 12:11:38 GMT -5 icedcoffee said:

I would really try not to worry about this. I think in general appraisals are coming back higher to account for this. I really think you'll be ok. And if it does, the seller may need to come down a bit. There are a lot of options if it does happen so I'd try not to put the cart before the horse.

Agree with this. Even if you’re prepared to bring that 20k, I’d still use a lower appraisal as an opportunity to see if you can get the price tag down some.

[scout8]

One thing that I have done as a listing agent when I've been worried about an appraisal is to meet the appraiser at the property and give them comps that I thought supported the sales price. Additionally, if there were multiple offers in a similar range as the sales price, I would provide those as well.

Really though, I'd try not to worry about it too much. What's going to happen is going to happen and you can figure out how to deal with it then . . . more down payment, re-negotiate price, etc.

[georgeharrison]

From what I understand, the appraisers are given the offer price and they check the house to see if it could be worth that based on the offering and the comps.

In the four selling/buying experiences that I have done in past 5 years, the appraisal came in exactly at the offer price.

[madringal]

Apr 7, 2021 16:29:51 GMT -5 georgeharrison said:

From what I understand, the appraisers are given the offer price and they check the house to see if it could be worth that based on the offering and the comps.

In the four selling/buying experiences that I have done in past 5 years, the appraisal came in exactly at the offer price.

This has been my experience as well.  A house is ultimately worth what someone will pay for it.  Unless its grossly overpriced, appraisals usually come in right at the offer price.

[hbomdiggity]

Apr 7, 2021 15:45:00 GMT -5 scout8 said:

One thing that I have done as a listing agent when I've been worried about an appraisal is to meet the appraiser at the property and give them comps that I thought supported the sales price. Additionally, if there were multiple offers in a similar range as the sales price, I would provide those as well.

Really though, I'd try not to worry about it too much. What's going to happen is going to happen and you can figure out how to deal with it then . . . more down payment, re-negotiate price, etc.

This is exactly what our listing agent was prepared with when we were in a multiple/over ask scenario. It ended up a non issue.

That said, I would def use a low appraisal as negotiation leverage.

[audry80]

They say the best way to appraise a house is by the price that people are willing to pay for it. We bought last year and had the same worry as you. Our purchase price was not supported by recent sales but it appraised exactly at the same amount of our offer.

[majesty318]

The bank waived the appraisal when we bought in September because they knew everything was selling high.

[Susie]

Apr 8, 2021 11:52:31 GMT -5 majesty318 said:

The bank waived the appraisal when we bought in September because they knew everything was selling high.

We had that experience too when we refi'ed in 2019, but this time our broker confirmed that we do need to have it appraised.  Oh well.  Got lucky once!

[brooklyn]

I bought in July (closed end of August), paying $25k over asking. Appraisal came in at $10k over that.

[tacoflavoredkisses]

I don’t have the exact amount our house ultimately appraised for yet, but we are in the middle of selling and our contracted price is the highest so far in our neighborhood- not by much, but still. The appraisal came back without any problems and was in line with the sales price.

[Pilsy]

Apr 7, 2021 16:46:15 GMT -5 madringal said:

Apr 7, 2021 16:29:51 GMT -5 georgeharrison said:

From what I understand, the appraisers are given the offer price and they check the house to see if it could be worth that based on the offering and the comps.

In the four selling/buying experiences that I have done in past 5 years, the appraisal came in exactly at the offer price.

This has been my experience as well.  A house is ultimately worth what someone will pay for it.  Unless its grossly overpriced, appraisals usually come in right at the offer price.

This is exactly what I was going to say, as I worked as an appraiser for a few years, and my boss said something along these lines from time to time. 

[awkwardpenguin]

I would try not to borrow worry while you wait. It will probably appraise appropriately.

We were sellers of a house that appraised about $20k below the offer. We dropped the price $10k and the buyers brought cash to close. Our real estate agent was helpful in the negotiations around what to do.

[Susie]

We talked to our agent about it at the inspection this morning, and she is not worried about the appraisal. She thinks it'll come back at purchase price, and definitely not lower than asking -- which is great. Thank you for talking me down, I will find other things to worry about for the meantime! Lol.

[Susie]

We got the appraisal back today, and it did indeed come in a little low, but not as low as I was afraid of.  $435k.  

Comp #1 was the house I mentioned above, closed 02/2021 at $430k, a few doors down the street, similar lot.  I have to admit it's the best comp there is.  It's just a very hot market right now.  

The rest of the comps in the appraisal I thought were weird choices.  None of the other houses I mentioned above (closings in Oct and Dec 2020, and Feb 2021) were included, despite being on the same street and closed in the last 6 months.  That's in our favor, since they were all low.  Instead they selected a much larger house than ours (3500 sf vs. our 2200 sf) on our street, that closed in July 2020, as well as another house in a nearby neighborhood that also closed in July 2020.  

Our options are:
1) just come up with the extra $15k for closing.
2) try to provide higher comps and ask them to revisit the appraisal.
3) see if the sellers will come down at least part way.  Their asking was $429,900, so asking them to come to $435k, or a midpoint between $450k and $435k doesn't seem outrageous.

I've asked our agent, but WWYD?  The $15k difference is like 3% of the purchase price, it is not worth losing the deal over, especially in the current market.  We're going to make it work somehow.  But how would you proceed?  

I'm wary of #2 because the selection of comps was so strange that I'm worried that they'd actually look again at recent (lower) closing prices on the street.

[icedcoffee]

I'd ask the sellers to meet you half way. I think that's perfectly reasonable and appropriate. They don't want this to fall through just as much as you don't want it to fall through.

ETA:  Thinking about it more.  I might ask them to come down all they way to $435.  Since you offered above listing they knew the house's value was closer to their listing price.

[hbomdiggity]

Apr 12, 2021 11:02:54 GMT -5 icedcoffee said:

I'd ask the sellers to meet you half way. I think that's perfectly reasonable and appropriate. They don't want this to fall through just as much as you don't want it to fall through.

ETA:  Thinking about it more.  I might ask them to come down all they way to $435.  Since you offered above listing they knew the house's value was closer to their listing price.

Yep yep yep.

Doesn’t hurt to ask. They can always call your bluff say no and/or counter. I would also say their agent should be working on #2.

[Susie]

Our agent suggested we propose as a new comp one of the recent same-street sales I mentioned above:  

02/2021 - $412k, across the street and a couple doors down, smaller lot.

Although the purchase price is lower, the lot is smaller (0.33 acre to our 0.61 acre), and the house is smaller (2040 sf. to our 2209 sf), so it works out to within $1-2 of our contract price/sq. ft.  Add in our much larger lot, and that seems like a better comp for us than I'd previously appreciated.  It is a much better comp for us than one of the comps used in the appraisal, which closed last July, and was a  ~3500 sf house, so only about $160/sf.  Our contract price and the $412k sale are both around $202/sf.

If the appraisal doesn't nudge up, then we can see about asking for a seller's concession.  We opted to start here though since we had a very reasonable argument, and it seemed lower risk than going to the seller, in such a strong seller's market.

[sometimesrunner]

I think that's a great idea, Susie . Let us know how it goes!

[carrotsmakemefat]

Apr 12, 2021 13:43:05 GMT -5 Susie said:

Our agent suggested we propose as a new comp one of the recent same-street sales I mentioned above:  

02/2021 - $412k, across the street and a couple doors down, smaller lot.

Although the purchase price is lower, the lot is smaller (0.33 acre to our 0.61 acre), and the house is smaller (2040 sf. to our 2209 sf), so it works out to within $1-2 of our contract price/sq. ft.  Add in our much larger lot, and that seems like a better comp for us than I'd previously appreciated.  It is a much better comp for us than one of the comps used in the appraisal, which closed last July, and was a  ~3500 sf house, so only about $160/sf.  Our contract price and the $412k sale are both around $202/sf.

If the appraisal doesn't nudge up, then we can see about asking for a seller's concession.  We opted to start here though since we had a very reasonable argument, and it seemed lower risk than going to the seller, in such a strong seller's market.

I just spoke with my Aunt today who happens to be an appraiser. This is the criteria you are looking for:
Comps from last 6 months, ideally 3 months.
Above grade SQ FT
Upgrades to the home
Similar homes in the neighborhood with the similar SQ FT, BR and Bath only
Woods behind you are more valuable than another home
Builder of the home, in some cases
Obvious but not being off a Main Street with a lot of traffic.

[pinkalicious]

Apr 12, 2021 10:57:14 GMT -5 Susie said:

We got the appraisal back today, and it did indeed come in a little low, but not as low as I was afraid of.  $435k.  

Comp #1 was the house I mentioned above, closed 02/2021 at $430k, a few doors down the street, similar lot.  I have to admit it's the best comp there is.  It's just a very hot market right now.  

The rest of the comps in the appraisal I thought were weird choices.  None of the other houses I mentioned above (closings in Oct and Dec 2020, and Feb 2021) were included, despite being on the same street and closed in the last 6 months.  That's in our favor, since they were all low.  Instead they selected a much larger house than ours (3500 sf vs. our 2200 sf) on our street, that closed in July 2020, as well as another house in a nearby neighborhood that also closed in July 2020.  

Our options are:
1) just come up with the extra $15k for closing.
2) try to provide higher comps and ask them to revisit the appraisal.
3) see if the sellers will come down at least part way.  Their asking was $429,900, so asking them to come to $435k, or a midpoint between $450k and $435k doesn't seem outrageous.

I've asked our agent, but WWYD?  The $15k difference is like 3% of the purchase price, it is not worth losing the deal over, especially in the current market.  We're going to make it work somehow.  But how would you proceed?  

I'm wary of #2 because the selection of comps was so strange that I'm worried that they'd actually look again at recent (lower) closing prices on the street.

I would hope that the seller’s agent prepared them for this scenario before listing. I always do with my clients. Sounds like the seller’s agent was spot on with her pricing too. Anyway, if I were the buyers agent (in a typical market) and appraisal came in low, I’d be fighting for the lower price for my client, but in this market I don’t know what I’d do. I feel like if the $15k isn’t a huge problem, maybe it’s worth it not to lose the house...but in reality, that’s a lot of money. If you can reach a happy middle ground, it might be the best option. I *knock on wood, please* haven’t had an appraisal issue. 1 came in $4,000 low, but still $26k over list (I was the listing agent, I fought to have buyers bring the extra $. And I priced it exactly where the comps were, our market is just insane!)

[Susie]

pinkalicious , we're still working with our lender on potentially appealing the appraisal and seeking a higher one, but if we don't end up doing that, we're just going to eat the $15k. We're in a very strong seller's market, there's nothing else we are interested in buying (and even if there was, we'd have a very good chance of not winning it), and we're on the verge of accepting an offer today on our house. We listed on Friday and have multiple to choose from, all above our asking. We can't afford to lose our house now over 3%. Plus, our sellers started backtracking on closing timeline (after they picked 5/26) and we aren't into it now that our plans are in motion. Since we aren't giving on the closing timeline, we wouldn't expect them to give on price. We're at peace with it.

Our house is also selling for more than it will appraise for, I'm confident. Appraisals just haven't caught up to market value yet. We asked $325k and have 3 written offers, 2 more promised, so far all in the $330-350k range. Our next door neighbor is in contract for $330k (on a slightly less updated house), it's definitely market value... but I know it'll appraise low. We're definitely looking at our buyers' down payment plans when deciding which to accept.

ETA:  if anyone wants to weigh in with advice on choosing between our offers, please do:  pandce.proboards.com/thread/626146/best-final-which-offer  

[lo]

Susie can I ask which bank you used to get that awesome rate?

We are seeing if we should refinance. Our appraisal came in lower than what we expected, too. The comps they used make zero sense.