Hoping to unload your investment property after months, years or even decades of holding onto it? Selling an asset for the right price is a true challenge, regardless of the strength of the local real estate market or the condition of your property. Selling a property requires you to jump through institutional hoops, and navigating the market as a seller is even more complex and time-consuming than as a buyer.
Among the most common issues facing real estate sellers is the idea that their properties may not ‘appraise out.’ This means an independent real estate appraiser has determined the value of the property is less than the agreed-upon sale price. Because of this, institutional lenders are unable to issue mortgages worth more than the appraised value of the property.
It’s an incredibly frustrating situation to be in—especially if you’ve already agreed to an offer from a prospective buyer!
After you’ve expended time and capital adding value to your investment property, it can be disheartening to hear it isn’t appraised at the value you (and a buyer) think it’s worth. Things get even more complicated if you’re hoping to quickly sell your investment for a profit, to increase your liquidity or consolidate your assets.
Thankfully, there are steps you can take to dispute low appraisals, or work with your buyer to sell your investment property at the original agreed-upon sale price. While it may require some additional effort, you can still reap the best possible return on your investment property. Plus, pushing back on the appraisal will ensure you’re making the most of the value you’ve added to your asset.
Disputing the appraisal
When facing a low appraisal, your first and most important course of action is to appeal or dispute the decision of the appraiser. Do this first!
While appraisers are independent real estate experts, they may inadvertently undervalue a property. Most incorrect appraisals boil down to simple, glaring mistakes. If you believe your property was incorrectly undervalued, here are some of the things you can do to appeal the valuation:
•Request a copy of the report: The first thing you need to do is request a copy of the appraisal report. As a seller, you won’t automatically have the appraisal report sent to you—in fact, you may have to request a copy of the report from the buyer or their agent. Once you have access to it, carefully go over the report and examine it for any potential errors. Look for glaring mistakes, like the square footage or number of rooms listed incorrectly. Even the smallest error can shave thousands off your appraisal price, so be thorough!
•Update your provided comparable rates: Appraisers rely on recent real estate sales to determine property values in your area. For instance, if a three bedroom home recently sold for $500,000 down the street, they’ll use this data to calculate the true value of your property. Because of the rapidly changing nature of the real estate market, however, it can be hard for appraisers to keep up with the latest sale trends in a specific area. If you’re aware of local comps, collect the latest data to send along with your appeal.
•Point out upgrades and improvements: If you’ve made any significant upgrades or improvements to your investment property, point these out to the appraiser. Everything from construction additions to new windows, to improved landscaping could all elevate the value of the asset. If you’ve made an improvement that doesn’t appear on the initial report, point it out. It’s important to keep all relevant site improvement permits—appraisers can’t consider any unpermitted improvements in the updated value of their appraisals.
•Ask for a second opinion: Consider hiring your own appraiser to come and evaluate the property and provide you with a second opinion. Another appraiser that’s more familiar with the area may provide you with a more accurate understanding of your investment property’s true value. Be aware, however, your buyer’s lender may not accept the valuation established by the secondary appraiser. Most lenders rely on contracted appraisers they have longstanding relationships with. It’s still a good idea to get a second opinion, to get a more factual figure of your property’s true value.
Working with the buyer
If you’ve attempted to dispute the appraisal, but to no avail, it’s still possible to sell your investment property at the agreed-upon price. Your buyer will need to work with you on some alternative solutions.
Your buyer is likely willing to work with you to identify a way for the transaction to go through if they’re committed to purchasing your property. The problem that stands in their way is the lack of financing. Solving this problem means the sale can move forward.
One way to overcome a low appraisal by asking the buyer to make up the difference in cash. While it can be challenging for some buyers to come up with enough additional cash to pay for both the down-payment and the discrepancy, it may be possible if you’re selling the property to another real estate investor.
If you’re working with a very motivated buyer who isn’t able to come up with the cash necessary to make up the discrepancy, consider offering to carry a second mortgage for them. You could loan them the money to cover the discrepancy, with the agreement they’ll pay the rest either in installments or in one lump-sum. In this case, you may also have the opportunity to collect a small amount of interest.
Of course, you may also want to consider slightly adjusting the sale price of your real estate investment property, to make it easier for the buyer to acquire it. Consider concessions like shifting closing costs over to the buyer, too.
Knowing how to fight incorrect appraisals and work with your prospective buyers to overcome low appraisals will help you navigate the challenges of the real estate market in a savvier manner. If you possess the knowledge necessary to reap a return on a property in spite of a low appraisal, you’ll be able to accelerate your journey toward financial independence.