How Homeowners Can Handle Appraisals

The gap between what homeowners think their house is worth and how a professional appraiser values it is getting smaller on average , according to a recent study by Quicken Loans. But as far back as 10 years ago and probably even further, the seller's estimation has been higher than the appraised market value. Especially in a market that's heating up rapidly, as is the situation now, low valuations are more common  because the comparison sales used are from when the market was in worse shape, as broker Diane Saatchi told Realtor.com.

In any case, it's common for real estate deals to be impacted when appraisals turn out differently than buyers or sellers were expecting. When both parties, as well as intermediaries like the appraiser and real estate agent, have some strategies prepared to cope with this event, it will benefit everyone involved.

For sellers

"Homeowners have several options if an appraisal comes in low."

If the market valuation of a home for sale comes in lower than the seller expected, they have several options. The most obvious and straightforward of them is to simply accept the appraisal. According to Trulia, this can be the most difficult option to handle, since no one wants to leave money on the table. This is why Trulia also suggested negotiating with the buyer . In some cases, the buyer may still be willing to pay more than the appraised value, particularly if some sort of concession is made. Otherwise, sellers may be able to meet a buyer in the middle between their higher estimate and the lower valuation. If the appraisal turns out to be $10,000 off from the list price, for example, the seller may offer to cut $5,000 from the offer if the buyer can bring another $5,000 to close. Whether or not this negotiation works depends on how willing each side is to compromise, as well as how flexible their respective financial situations are.

For buyers

Obviously, if an appraisal comes in low for a buyer, this is good news. A valuation that's higher than expected could create problems for a buyer, however. Lenders will usually not adjust their loan approval offer to account for greater-than-expected market value, and sellers will want to squeeze as much as they can out of a high sales price. According to Trulia, buyers and their agents are more than welcome to request a review of their appraisal. In this case, the appraiser will reconsider other comparable properties and check for discrepancies. Perhaps one of the comps was a short sale, or another had less obvious problems that prevented it from selling at market value.

Buyers can also opt for an entirely new appraisal as well, but this will come at an extra cost to them. They also note that the chances of getting another appraisal that hits the mark are slim. If it's any concession, the seller may agree to split the cost of a new appraisal in case of a low valuation. While a buyer may well want to take advantage of a lower price, this could come back to haunt them when they try to sell the home later on. Still, a second appraisal carries little hope for success because it also depends on the lender's willingness to reject an appraiser's findings. As Trulia noted, without a compelling reason to doubt the original appraisal, and without the same investment in the deal as the buyer or seller, the lender is unlikely to allow another valuation.

Walking away

If neither party is willing to compromise, the only option left is to walk away from the sale. Realtor.com noted that in the current hot housing market, many buyers are offering to forfeit their appraisal  contingency to make sure a deal goes through. However, since home valuations are rising with the market, an appraisal that arrives above a buyer's preapproval amount means the buyer will have to cover the difference or walk away without the deposit. The outcome of a forfeited appraisal contingency can swing either way for a buyer, so the decision to go down this route must be carefully considered.

If a seller is displeased with the appraisal amount, and the buyer isn't willing to negotiate favorably, the only other option available is to terminate the deal and put the house back on the market. According to Trulia, this usually stings, as there is often quite a bit of work that has gone into the deal up to that point. It may not be so bad, though, if the seller had entertained previous offers - there may still be a buyer willing to pay what you want. In the current seller's market, it's more likely that a cash offer could come along. Alternatively, a second opinion may prove more favorable. On the opposite side of this argument, Trulia noted that a home that's been off the market for several weeks only to reappear could spell trouble for future sales efforts.