How Often Do Home Appraisals Come in Low?
If you’ve just gotten an appraisal back you may be wondering: How often do home appraisals come in low? No matter the state of the local real estate market, we can all find ourselves in this unfortunate situation. But not to worry! If your appraisal happens to come back lower than expected, there are steps you can take to move forward (whether you’re a buyer or a seller). Like what?
Let’s discuss some reasons an appraisal might come in low and, more importantly, what you can do if your appraisal isn’t high enough.
What is a low appraisal?
As you may know, appraised value is estimated property value as determined by an unbiased expert—a licensed appraiser. A low appraisal is when that value is lower than a seller’s asking price or the offer a buyer and seller have agreed upon. This can raise a problem.
Lenders such as banks rely heavily on the appraisal price to determine the maximum loan amount a borrower can receive. It’s part of a risk assessment calculation called the loan-to-value (LTV) ratio. One purpose of this calculation is to protect the mortgage lender in case the buyer defaults on their mortgage loan.
For example, if a home goes into foreclosure, the buyer’s lender needs to be able to sell the home for a high enough price to recoup their money. But that’s difficult if they originally lent more than the home was worth… especially if it’s worth even less at that time.
In other words, a low appraisal can threaten an otherwise solid deal if it doesn’t line up with fair market value (AKA what buyers are willing to pay). So how often do home appraisals come in low? And when they do, what are your options?
Why might an appraisal come in low?
There are many reasons appraisals can come in low including the following 3:
- Overpricing: Ongoing shifts in the market, several recent foreclosures in the area or the presence of many distressed homes can affect the value of a home. Sometimes without sellers even realizing it. So if they overprice their homes, the appraisal value is bound to be lower than expected.
- High demand in the local market: Are you in a seller’s market where the demand for homes is greater than the supply? While this has its advantages for sellers, it can also start fierce bidding wars that hike prices up far higher than homes in the area are worth. Of course, this can be reflected in appraisal reports.
- Appraisal errors: Appraisers are typically very careful to perform unbiased assessments and to consider all relevant details. But mistakes do happen from time to time. For example, they may overlook recent home upgrades that increase value. Or they may look at comparable sales that aren’t similar enough to the home they’re appraising or recent enough to determine an accurate value. Besides that, every professional has to start somewhere. Did you end up with an inexperienced appraiser? If so, the value they put on a home could be lower than what a well-trained, experienced appraiser with deep local knowledge would come up with.
How often do home appraisals come in low?
The above issues might seem concerning but, according to Fannie Mae, “the vast majority of appraisals confirm contract price.” In fact, they come back low less than 10% of the time. So, chances are, you won’t run into this issue. But if you do?
What happens if a house doesn’t appraise for asking price?
If your appraisal isn’t high enough, here’s what you can do:
6 options for buyers if an appraisal comes in low
If you’re the buyer, you can:
- Dispute the appraisal and request a second one. This is a good option if you suspect you had an inexperienced appraiser. Or if you or your Realtor® spot something missing or incorrect in the appraisal report. However, the request for a second appraisal must be approved by your lender.
- Pay the difference in cash. In other words, make a bigger down payment. For example, if the appraised value is $5,000 lower than you need it to be, you can pay that amount in cash to achieve the LTV ratio required by your lender.
- Shift money away from your down payment. The opposite of the method above, you can take some of the money you’ve set aside for your down payment to make up for the difference between the appraised value and purchase price.
- Negotiate a lower home price with the seller. This can be particularly effective if a home has been on the market for a while and the seller is ready to get it off their hands. Consider asking them to drop the price to match the appraised value or, at least, meet you in the middle to close the gap.
- Make an all-cash offer. If you really love the home and can pay cash for it, you can avoid mortgage lender requirements like LTV altogether.
- Walk away from the deal. Although this isn’t ideal, if there’s no suitable way to bridge the gap and you signed an appraisal contingency, you’re free to walk away from the deal. (An appraisal contingency ensures that you’ll get your earnest money deposit back so including one if your offer is recommended.)
5 seller options if an appraisal comes in low
What are your options if you’re a seller? You could:
- Request a copy of the appraisal report. Ask the buyer’s agent for a copy. Review it to check for any incorrect or missing information that could’ve affected the outcome. (If you had a pre-appraisal done, compare the buyer’s report with yours to more easily spot discrepancies.)
- Ask the buyer to dispute the appraisal. If you spot issues in the appraisal report, suggest that the buyer request a second appraisal.
- Negotiate a lower selling price with the buyer. This may be effective if there’s been little interest from other potential buyers and you don’t want to wait any longer to sell.
- Offer financing to the seller. Don’t want to negotiate a lower price? You could essentially loan the difference to the seller and set up a repayment agreement (with the help of a lawyer, of course).
- Walk away from the deal. If you can’t reach an agreement that works for both you and the buyer, re-list your home and try to find another buyer.
How to prevent your appraisal from coming back low
Before you get to the point of wondering what happens if appraisal is lower than offer, consider going upstream to minimize the problem. An ounce of prevention is worth a pound of cure, as the saying goes. So, if you’re not already trying to overcome a low appraisal as a seller, focus on prevention.
- Clean up. While appraisers don’t formally take clutter or cleanliness into consideration, both can make the appraisal process more difficult to do accurately and/or make it seem that your home hasn’t been cared for very well. So be sure that everything is clean and tidy.
- Be available for questions during your appraisal. While you don’t want to be underfoot, you can make yourself available to answer any questions that arise. This can give the appraiser more context with which to evaluate your property.
- Provide documentation of things that add value. Make sure you have receipts for major repairs and recent improvements to your home. This will ensure that no significant details are missed in the report.
- Provide information about comparable sales in your neighborhood. If your real estate agent has done a comparative market analysis (CMA), share it with the appraiser to help them evaluate comparable homes in your area.
Additionally, if you want to go a step further, work to increase your home’s value. This can include anything from taking care of necessary maintenance to modernizing your home. If you want to make the selling process as smooth as possible and sell for the highest price, it’s worth learning how to increase your appraisal value and why you should.