You know that a low appraisal of your home can scuttle your chances to refinance. But did you know that a low appraisal can also swallow your profits when you're ready to sell your home, or that a low appraisal can even derail a sale after you and a buyer have agreed on a purchase price?
There are ways to work around a low appraisal of your home when you're trying to sell it. But these solutions will cost you. You'll need to bring money to the closing table, convince your buyer to do the same or sell your home for a lower price.
You might even have to take your home off the market until it increases in value.
There is some good news, though. Mortgage lenders say that this problem, though it still exists, is becoming less frequent.
"Home values are continuing to rise," said Staci Titsworth, vice president and regional sales manager at the Pittsburgh office of PNC Mortgage. "That means that low appraisals aren't as common as they once were. Of course, they still do happen. And when it does happen, it's not an easy problem to solve."
How a low appraisal can hurt
Here's how a problem develops: You've put your home on the market for $250,000. A buyer makes you a full offer. That buyer's mortgage lender will require an appraisal of your home because lenders don't want to loan their buyers more money than what a home is worth.
The appraiser then comes back valuing your home at just $190,000. Now you have a problem. Your buyer's lender won't approve a loan of $250,000 if your home isn't judged to be worth more than $190,000 in the current housing market.
What happens now?
Lower your price
You can always lower your price to the appraised value. In the above case, your buyer would then pay you $190,000 for your home. The buyer's lender would approve this because it's not passing out more money than what your home is worth.
There are drawbacks to this solution. First, you won't make as much profit. But you might face even more problems depending on how much you owe on your home.
Say, in the above example, you owe $220,000. If you agree to lower your sales price to $190,000, you'll not only lose profits, you'll owe your lender $30,000 once your sale closes. Do you have that much money to pay to your lender? If not, lowering your price might not work.
The buyer brings cash to the table
If your buyer has available cash, you might have a better solution. In the above example, your buyer can take out a mortgage loan for the $190,000 that your home has appraised for. Your buyer can then bring $60,000 to the table to pay you to reach your agreed-upon sales price of $250,000. You would then have enough money to pay off your lender the difference between what you owe on your loan ($220,000) and the $190,000 that your buyer was able to secure in mortgage financing.
Your buyer might not be willing, once the appraisal suggests a lower figure, to pay $250,000 for your house. But if your buyer is willing to provide at least enough cash to make up the difference between what you're selling your home for and what you owe on your own mortgage, you might still be able to close the home sale.
In our example, your buyer would have to provide an extra $30,000 in cash to cover the difference between the "official" sales price of $190,000 and the $220,000 that you still owe. You'd lose $30,000 on this deal - the difference between $250,000 and $220,000 - but you'd still be able to close the sale.
Of course, this assumes that your buyer is both willing to bring this cash to the table and has enough of it lying around to be able to do so. That isn't always the case.
Try again later
Do you think your home appraisal is realistic? Does your real estate agent? If you think the appraisal is too low, you can always order your own. There's no guarantee, though, that your appraisal will come in significantly higher. And even if it does come in higher, there's no guarantee that your buyer's lender will accept any appraisal other than the one it ordered.
If you and your agent think that your appraisal is realistic given the current housing market, you might have no choice but to put your home sale on hold.
Remember, you will build equity with every mortgage payment you make. Your home's market value might also increase on its own if you wait long enough to make a sale.
Dan Smith, president of PrivatePlus Mortgage in Atlanta, says that the low-appraisal problem when it does pop up is a difficult one to resolve when the appraisal is an accurate one, as it usually is.
"More often than not, a low appraisal results in a lower sales price or a broken sale," Smith said. "The price is either adjusted for the current value or the buyer chooses to move on to another property."
This speaks to the importance of the seller appraisal. Before putting your home on the market, order an appraisal. You'll pay $400 or more, but you'll at least get a feel for how appraisers value your home. If the appraisal you order comes in too low to allow you to make a profit on your sale this might not be the time to list your property.