Dealing with a Low Appraisal
Your lender wants to be sure its investment is covered in case you default on the loan. If the property under contract appraises lower than the sales price, the loan may be declined. Don't panic if that happens, because there are steps you can take to make the deal work if you still want the property.
Cash buyers should always insert a clause in their purchase contracts stating that they can back out of a contract with no penalties if the property does not appraise at or above the sales price. Buyers seeking financing are usually protected by a financing contingency — poor appraisal, no loan.
You can dispute an appraisal if you feel it is incorrect. Be prepared to tell the lender — in writing — why you do not agree with the report. Perhaps you know that one or more of the comparables the appraiser used was in terrible condition, and not a good comparison to the property in your transaction. Do you have proof? An old multiple listing service description showing the property was sold “as is” would help your position. Similar statements from the former listing agent would offer more reinforcement that the property needed repairs.
Appraisers rely on written documentation to select comps. They will usually adjust their reports if you can show them that a property doesn't truly match the one under contract.
If that doesn't work, the seller might be willing to save the sale by reducing the sales price. The realization that future appraisals might not be much better is a powerful motivation for the seller to get the transaction over with and move on.
If the seller won't reduce the price, and you still want the property, you could talk with the bank and offer to make a larger down payment, but more down does not guarantee they will approve the loan. Banks often don't like to lend money if the borrower ends up with negative equity in a property. That occurs when the value of a property is less than the amount it sold for.
