The first thing you should do is have your real estate agent show the appraisal report to the seller’s agent and ask them to lower the price to match the appraised value. If they agree, then that is your best option. The purchase agreement is amended to the new price, you send that page to your loan officer, and then the loan officer adjusts your down payment and loan accordingly.
If the seller does not agree to lower the price, then you have two choices. You can either make up the difference with cash out of your own pocket, or you can walk away from the deal.
To Make Up the Difference in Cash
Let’s say the sales price is $200,000 and the appraised value is $190,000. In this case, you would have to kick in an extra $10,000 out-of-pocket if the seller will not lower the price. This is because lenders will not go higher than the appraised value for their loan. I suggest you think do a thorough market analysis and put your emotions in check before you take this option. Why would you want to pay more than the property is worth? You’d want to have a very compelling reason to make such a financial decision.
To Walk Away
The seller might disagree with the appraised value and think that a different buyer with a different lender will get a different appraised value; therefore, they might not agree to lower the price. You should have a contingency clause in your purchase contract that allows you to walk away and get all of your earnest money refunded if this happens. A good buyer’s agent always makes sure you have such a clause, and this is one mistake do-it-yourselfers who are not represented by an agent sometimes make. I once witnessed a terrible fight break out between a For Sale By Owner seller and a buyer who went straight to the seller without agent representation. Believe me, it was quite a spectacle when the yelling turned into threats to “take it out onto the street.”
One More Option
Occasionally, there is an appraiser who royally messes up the value. The report that comes in is nothing short of idiotic. The comparable properties are totally inappropriate with better comps in the neighborhood ignored. Not only that, but special features that increase the property value have been ignored. When this happens, the seller probably won’t lower the price. If you want to continue to fight for this house, you can ask your mortgage broker to go to a different wholesale lender for the money and thus start fresh with a new appraiser.
This works because your loan file goes to a whole different company with a different underwriter who never saw the bogus appraisal. Of course, you will need to pay for another appraisal.
If your lender is a direct lender or a bank and does not have the option to shop wholesale lenders for you, then this choice is not available. Once an underwriter has seen an appraisal, she (or he) will not consider a different appraisal, even if the second one is more accurate. Only if the original appraiser will change the report will the underwriter accept a different value. (Getting underwriters to change their reports, even when they are dead wrong, is impossible 99% of the time.) So in this case, you would have to withdraw your application from the bank and shop for a mortgage broker yourself in a super speedy manner. Depending on the closing date, this could be problematic.
No matter which option you choose, you need to discuss the situation with your real estate agent and your loan officer. With the three of you working together, you should be able to select the best choice and protect your earnest deposit.