Ask Phyllis!

Appraisal Drama

Dear Phyllis,

My wife and I bought a fixer in Glendale. There were more than ten offers and apparently ours was the best.  We had our inspection and although the home needs to be completely gutted didn’t ask for any credits.  After the appraisal came in $40,000 low we asked the seller to reduce the price by just $20,000. They refused to lower the price even a bit. By this time, we were so far in the process that we just increased our down payment and closed escrow.  In your experience what typically happens when the appraisal comes in low?  Jeff

Dear Jeff,

Congratulations on your new home!

What happens when the appraisal comes in low?

In today’s market, often there is not a renegotiation. When the appraisal is low, the buyer can cancel and have their deposit refunded (assuming they had an appraisal contingency). The seller can reduce the price by the difference or some other amount. Or refuse to make any concession. In your instance because the seller refused to make any concession, you needed to increase your down payment. Lenders base their loan on a percentage (such as 80%) of the lower of the appraised value or purchase price. 

As there were so many other offers, the listing agent could have simply “gone down the buyer list” to learn if another buyer would be willing to accept the home. The listing agent should give any other potential buyers a copy of your inspection report. Likely asking these buyers to waive the appraisal contingency.

Since the passage of the Dodd- Frank Act, lenders are no longer allowed to have direct contact with appraisers. Most appraisals are ordered by a management company who take a big cut of the appraiser’s fee. Be assured that not all appraisers are created equal. I have seen many poor-quality appraisals which come in low. Often these appraisers use incorrect information and when confronted with their errors they usually won’t correct them.  There are no ramifications for poor appraisals.  The management company and the appraiser continue to get hired.

A home is worth what a buyer will pay, not the amount of the appraiser’s valuation. As there were more than ten other buyers for this home, it seems that you didn’t overpay, but simply paid market value.