A home’s market value and appraised value are different creatures. A low appraisal may simply mean a lender is being cautious in case they have to sell the home. On the other hand, your offer may be too generous. Let’s look at both.
A realtor’s competitive market analysis (CMA) compares a home for sale to others that have recently sold or been listed in that area. Realtors have a pretty good idea what a home is worth just by looking at its age, size, condition, location, and what it previously sold for. The CMA is what a realtor thinks buyers are prepared to pay.
A mortgage lender, on the other hand, is a party to the title to a property. Lenders have a registered interest or charge on a property. They can take the home if you default, abandon it, or let it fall into serious disrepair.
Consequently, bank appraisals are usually more cautious than CMAs. Assessments are based on a home’s general condition, land value, property size, and interior features. For example, updated plumbing, electrical, and mechanical systems get high marks. Appraisers also compare homes to “comps”, three to 10 similar properties on the MLS.
What to do about gaps between what you offered and a lender’s appraisal? You can:
- Make up the difference between your offer and what the lender is prepared to mortgage.
- Ask the seller to lower their price.
- Get an independent appraisal.
- Cancel the agreement of purchase and sale. Be aware you may lose your deposit, and be liable for the seller’s expenses to relist their home, or sued for the difference between your offer and what it sells for. Just be sure you can prove the home was overpriced.