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Whether buying or selling a home, the appraisal is the most critical aspect of the process. No matter how carefully the seller’s agent researched the current market or how much the buyer is willing to spend on the home, the lender relies solely on the appraiser’s estimate of value when deciding how much to lend to the borrower for the purchase. A low appraisal, therefore, changes the whole game. Let’s examine the process and three things you should know about it.
What is a Home Appraisal?
An appraisal is an unbiased professional opinion of a home's value. Appraisals are almost always used in purchase-and-sale transactions and commonly in refinance transactions. In a purchase-and-sale transaction, an appraisal determines whether the home's contract price is appropriate, given the home's condition, location, and features. In a refinance transaction, an appraisal assures the lender that it isn't handing the borrower more money than the home is worth. A property's appraisal value is influenced by recent sales of similar properties and by current market trends. The home's amenities, the number of bedrooms and bathrooms, the floor plan's functionality, and the square footage are also key factors in assessing the home's value. The appraiser must perform a complete visual inspection of the interior and exterior and note any conditions that adversely affect the property's value, such as needed repairs.
Why the Appraisal May Come Back Low
The market value determined by an experienced real estate agent typically matches or comes close to, the appraiser’s estimation of value. Low appraisals generally occur when the seller uses an inexperienced agent, but low appraisals are also quite common when the home has received multiple offers. Bidding wars frequently cause a home to go into contract for more than it’s worth. Some homeowners don’t listen to their agent’s advice and overprice the home. The seller may feel vindicated when receiving a full-price offer, but that feeling is dashed when the appraiser agrees with the agent that the house isn’t worth as much as the buyer is willing to pay. Other reasons for a discrepancy in the home’s evaluation include:
A shift in the local economy that impacts the housing market. For instance, if many foreclosures hit the market quickly, surrounding home values decline.
The agent and the homeowner may undervalue specific improvements made to the home. In this case, the appraisal may come in higher than expected.
The appraiser may feel the home’s location or condition brings down its value more than the agent and homeowner did.
How to Deal with a Low Appraisal
The mortgage company will not lend above the appraisal price in a home sale. For the sale to go through, the buyer must either negotiate with the seller to take less for the home or make up the difference – also known as “the appraisal gap.” Taking less for the home is not an attractive option for most sellers, and buyers typically don’t want to fill that appraisal gap by paying more for a home than it’s worth. A solution to a low appraisal is for the buyer and seller to meet halfway. The seller can lower the price, and the buyer can bring in more cash. Another option for the buyer is to challenge the appraisal, which isn’t as easy as it may sound. The seller will need to get involved by verifying the report’s accuracy.
Appraisers are human, and they sometimes get things wrong. Some of these include square footage, the number of bedrooms or bathrooms, and the age of the home, and these errors may be on the subject property or the comparables used by the appraiser. Sometimes, sellers know the conditions of a particular sale in the neighborhood that the appraiser isn’t privy to. Perhaps your neighbor got a job offer in another state and, to get there quickly took a low offer. If you find inaccuracies, you can challenge an appraisal and request a new one from the lender. The lender is not obligated to agree with your request, but it’s a question worth asking.
Questions about selling or buying a home? Feel free to contact me!
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