What Do You Do When Your VA Appraisal is Low?
First, I have to thank groups of ill-informed people on the internet. Since I’m in the business of educating people about buying real estate, they give me tons of material to work with. Often it’s people who bought a home (once) or sold a home (once) and now are resident (and residence 😜) experts.
Scarily, sometimes they’re Realtors, usually newly minted who have seen a thing or two (literally) and think that’s how it is everywhere. Fortunately, I happen to have learned the answer to any real estate question is almost always “it depends” or “ask your broker.” So when a buyer posed the question of if she should pay more than the appraised value in a forum recently, a whole lotta knee-jerks took up the cause and I felt the need to clarify some things.
Quirks of VA Appraisals
VA appraisals get a bad rap. Some of the prejudices are leftovers from the past, like seemingly nebulous Minimum Property Requirements that derail transactions, and appraisals that stick to a property for months, reducing the potential buyer pool for a home.
Those things used to happen sometimes. I’ve personally had an appraiser call a particleboard false bottom in a bathroom cabinet “structural” and require its replacement. But a trip to Home Depot and $25 was the easiest way to fix that problem, even if my head hurt from rolling my eyes the whole time.
Mostly, though, problems with VA appraisals are about the value of the home, not the condition. It’s not that VA appraisals are particularly tougher than others. It’s that the VA addendum to a sales contract allows the VA buyer to walk away if the appraised value of the property is even a dollar less than the contract price, and a lender usually will not lend more than the property’s value.
So this provides a giant, gaping loophole through which a VA buyer may choose to escape the contract. And that’s unsettling for a seller who wants 1. money and 2. certainty.
Tidewater Notice
If an appraiser believes the appraised value will be lower than the contract price of the home, she is required to call the designated point of contact and allow him the opportunity to provide more information to support the value. This route can often avoid a problem. A few years ago when an appraiser used a condo of the same floor plan adjacent to one my buyers were purchasing as a comparison, but the photos did not show the unit had a 1970’s kitchen and bathrooms while ours was completely remodeled, she issued a Tidewater Notice. Once we could provide more information on the differences between the units, there was no concern.
Low VA Appraisal Options
If the appraisal is lower than the contract price, the buyer has a few options:
cancel the contract,
ask the VA to reconsider the value,
ask the seller to reduce the price to the appraised value,
negotiate a new middle-ground price with the seller and contribute some cash toward the deal, or
pay the full difference in cash.
Does a Reconsideration of Value Really Work?
According to David Baca, my trusty lender guide at Guaranteed Rate Affinity, the veteran must be the one to request a reconsideration of value, and the maximum increase allowed is five percent.
We recently helped a VA buyer request a reconsideration of value on property that appraised for $31,000 less than the contract price. The reconsideration raised the appraisal by $13,000, to a price buyer and seller could agree upon.
- David Baca
Strategies to Negotiate Low Appraisals
When does it make sense to cancel the contract? As a first step, only when you actually want out. If you’re now convinced this home is no longer the one, the low appraisal gives you the option you need. Otherwise, try to negotiate something else. If none of the other options work, you still have the right to cancel.
Asking the seller to reduce the price to the appraised value can’t hurt. As long as there is no provision in your contract allowing the seller to kick you out of the deal in addition to refusing your request, then ask. The odds of a seller approving that request depend on the market conditions, and you should set your expectations accordingly. If a seller has a back-up buyer ready to step in, he or she may have a great reason not to lower the price, or even to pressure you to leave. If the market has trended hotter since you went into contract and the seller thinks they can get even more today than just a few weeks ago, then they’ll probably say no. Conversely, if there’s no one waiting in the wings and the property didn’t see much action, you’re in a strong spot.
Proposing the seller reduce to the appraised value at least leads to the next step in negotiation, asking the sellers what they would be willing to do. If the sellers won’t reduce to the appraised value, maybe you can find a mid-point you can both digest.
When Is It OK to Pay More?
Appraisals look back at what has happened in the past, with the most emphasis on closed sales. So, in an ascending market sometimes appraisals just don’t keep up with what the market is willing to pay. Think of a low appraisal as a warning light for a buyer in a fast market. If your market is not clearly improving, your prospects for renegotiating are stronger.
If your market is appreciating, then is it really a risk to pay a little out of pocket to get the house you want? If you can look at comparable sales and the market direction and see that the money you may pay out in cash now will be made up in a matter of months and you have that cash available to spend, then does it really matter? There’s no set amount over the appraised value that is ok to pay. It depends on your financial ability and the cost of homes in your market. For example, paying $5000 extra on a $500,000 house is only 1% more.
Also, don’t discount the emotional and situational value of the house. Do you love it? What is that worth? Do you not particularly love it, but having the matter settled is valuable for your peace of mind? Then those intangibles are where you find the value.
Is Canceling the Contract the Right Choice?
Have you made other offers, but keep losing to buyers with more cash or better terms? Or was it hard to find a home you even wanted to offer on? Those are indicators you should stick with the property you won.
Is the amount of cash you’d put down comparable to the cash you’d spend to start over inspecting and appraising the next property and possibly having the same thing happen? If so, maybe the certainty of this home is better than what you may find if you start over.
In 5 or 10 years when it’s time to sell will you even remember that you contributed some cash to make the deal work, or will it not matter at all?
You Should Also Know…
There are a few other points tangential to this discussion that should be considered.
I find VA buyers sometimes lose touch with the reality that everyone else actually HAS TO put cash down to buy a house. An FHA loan, a program similar to the VA loan, requires 3.5% cash down. Most conventional lenders require at least 5% down and buyers putting less than 20% down usually pay mortgage insurance. The VA loan is an invaluable opportunity, but it’s not free.
Appraisals are one person’s opinion of value. Sometimes appraisers aren’t very familiar with the local area and use comparables that don’t make sense. Sometimes they have biases influencing their work, such as this recent case of discrimination. And sometimes there isn’t a lot of market data to use. So, compare the data in the appraisal to what your Realtor can provide from the MLS to fact check the appraiser and have a conversation about that.
There was a lot of catty talk in the forum about the Realtor of course wanting the buyer to go ahead and pay more, assuming the Realtor’s paycheck was the driving factor. The commission difference in this case, where a buyer was considering paying $6000 more, was only about $120 in the agent’s pocket. If your Realtor is willing to throw you under the bus for that little money, by all means, fire her. But that’s probably not what’s happening. Most of us don’t want to ruin a relationship and risk a poor review or the potential for future business for a quick $120.
I think I’ll just leave it at that…
If you’re running into VA appraisal problems, the answers are “it depends” or “ask your broker,” but if you want to talk through it with me anyway, I’d love to hear from you.