How to save a deal when the appraisal comes in low?
Rob Miller explains the exact steps real estate agents can take to save a transaction when a home appraisal comes in under the purchase price.
Rob Miller, Branch Manager at MadCity Home Loans, answers one of the most common questions we get from our Realtor partners.
How to save a deal when the appraisal comes in low?
In a highly competitive market like Dane County, buyers are routinely bidding over asking price. The nightmare scenario for a Realtor is when the appraisal comes back $15,000 under the contract price.
Before you panic and let the deal fall apart, here is the exact playbook we use to save the transaction.
1. Re-Structure the Financing (The PMI Pivot)
This is the easiest fix, and as the lender, it is our job to run this math.
Let's say your buyer was putting 20% down to avoid PMI. If the appraisal comes in low, the bank will only lend based on the appraised value. Instead of the buyer bringing $15,000 extra in cash to cover the gap, we simply change the loan to a 10% or 15% down program.
The buyer uses the cash they were going to use for the down payment to cover the appraisal gap. Yes, they will now have a small PMI payment, but their cash-to-close stays exactly the same, and the deal closes on time.
2. The Reconsideration of Value (ROV)
If the appraisal is legitimately flawed (e.g., the appraiser missed a finished basement or used a comp from a different school district), we can file a Reconsideration of Value.
As the Realtor, you must provide us with 3 to 4 better comps that closed prior to the effective date of the appraisal. You cannot just argue that the market is hot; you have to provide hard data that the appraiser missed. Our team will submit the ROV and fight for the value.
3. Negotiate a Middle Ground
If the value won't budge and the buyer doesn't have the cash to restructure, it's time to negotiate. Often, the seller doesn't want to relist the house and risk another low appraisal with the next buyer. We frequently see deals saved by the seller dropping the price by half the gap, and the buyer covering the other half in cash.
Related Guide: Want to learn how we proactively structure loans to avoid these issues? Check out our 12-Step Mortgage Process.