Last week, we discussed the difference between market value and appraised value, and the reasons behind discrepancies between the two. This week, we will tackle that situation where the appraised value comes in short of (is lower than) the agreed-upon sales price — the market value. While we know this is not an ideal situation — current market conditions, such as low inventory and high buyer demand, likely lead to this outcome at some point for your buyer or seller. Let’s discuss the available options:
1. You can renegotiate the purchase price.
Depending on how you structured your initial purchase contract, you may be in a position to renegotiate the purchase price to match the appraised value or settle on a figure in between.
2. You can request a reconsideration of value.
If you believe there are significant issues with the appraisal such as missing room count, incorrect square footage or overlooked comparable sales, you can request the lender to submit a reconsideration of value to the appraiser with supporting data. The key piece is that these issues are tangible material defects, rather than subjective evaluations of upgrades. Stay tuned as this process will be changing in the coming months to be more formalized and initiated by the buyer rather than the lender.
3. Propose an appraisal gap addendum.
An appraisal gap addendum is a clause in the offer outlining that in the event that the appraisal is lower than the agreed-upon purchase price, the buyer agrees to pay the difference up to a specified amount. However, this does not always mean that the buyer needs to bring the entire gap amount to closing.
Often, buyers structure their loans to either put down a specific downpayment or a percentage of the purchase price, which is how the loan-to-value ratio is calculated. The lender will be able to recalculate the new loan to value off of the appraised value vs. the sales price and offer alternative financing options to the client.
Your Key Mortgage loan officer is educated on all of your options and is here to help. If you want to know how to incorporate these discussions into your consultations, reach out to your Key Mortgage loan officer.
