You’ve been shopping for the home of your dreams for months and finally found “the one.” You negotiated a fair price with the seller, the house passed its inspection with flying colors, and you’re anxiously waiting for closing day.
Then, the deal hits a snag. The property gets appraised for less than your offer. You start to panic because you see your dream turning into a nightmare.
You wonder: How could this happen? But this scenario pops up quite often in hot housing markets. For example, according to CoreLogic, nearly one out of five appraisals in 2021 came in lower than the contract price.
So, take a deep breath, and don’t give up on the home yet. It’s possible that you and the seller can resolve this fairly common issue.
We’ll look at six potential reasons why your home appraisal came in lower than you thought it would. We’ll also share what you can do in this situation.
What is a Home Appraisal?
Before we dive into the meat of the issue, let’s come up with a working definition of a home appraisal and discuss why your lender requested one. A home appraisal is an unbiased, professional, third-party assessment of the property’s value.
The appraiser reviews the condition and amenities of the property. Then, they check the recent sale price of comparable homes in the area. Finally, they assign the home a value and report their findings to your lender.
Your lender requires this information before they will issue you a mortgage. They need to be sure that the home is worth at least as much money as they lend out because if you default, they want to recoup their investment when they sell it post-foreclosure.
Key Term: The difference between the appraised value and the contract price is called the appraisal gap.
Potential Reasons for a Low Appraisal
Your target property may appraise low for several reasons. Here are some of the most common:
Market Changes
The real estate market can change rapidly, making it difficult for appraisers to keep up. For example, if you want to buy a home in a hot market, offering more than the asking price may make sense.
But if that area hasn’t been hot for long, recent comparable home sale records may show similar properties closing for much less. In that event, the appraiser may not be aware of the trend and would give a low appraisal as a result.
Overpriced Property
It’s possible that the seller overestimated the property's value when they listed it for sale. In that case, comparable local homes likely recently sold for less, resulting in a low appraisal.
Limited Comparables Available
If your property is unique or in a rural area, your appraiser could struggle to find local comparable home sales to use in their valuation. When this happens, they have to make an educated guess based on the other factors of the situation, which could produce a low appraisal.
Home Needs Work
Condition plays a significant role in determining a home’s value. So, if the appraiser notes that the property needs considerable maintenance or repairs, it could appraise for less than anticipated.
Pro Tip: Give your house a deep cleaning and take care of as many common home repairs as financially possible (or practical) before your appraisal.
Many Foreclosures or Short Sales in the Area
Foreclosures or short-sale properties typically sell for less than other homes. If the appraiser views those houses as comparable to the property you want to buy, you could end up with a low appraisal.
Appraiser Got it Wrong
Appraisers follow strict guidelines when they value a home. However, they’re human, which means they can make mistakes. Your low appraisal may be due to their error.
What Happens Next?
So, the appraiser submitted a low appraisal to your lender. Now what? Here are a few things you can do:
Challenge the Appraisal
You may be able to challenge the appraisal if you disagree with the appraiser’s opinion. You can ask your lender to request a reconsideration of value (ROV) from the appraiser.
You can also ask the lender to request a second appraisal. However, they’re not obligated to order another report.
Whether you challenge the existing appraisal or request a second opinion, there’s no guarantee the value will change. If it doesn’t, you still have some options.
Negotiate with the Seller
If the seller is motivated to close the deal, they may be willing to reduce the price to align with the appraisal. You could also offer to make up the difference between the agreed-upon price and the appraised value. Or, you could meet in the middle, with the seller lowering the price by half of the difference and you covering the rest.
Back Out of the Deal
If all else fails, you may have to accept that you’re not meant to buy that house, and back out of the deal. In that event, try not to dwell on your disappointment for too long. Stay open to different possibilities, and another amazing property will come along.
Pro Tip: Ensure your real estate purchase contract has an appraisal contingency. That way, you can negotiate with the seller or walk away without losing your earnest money.
What if I’m the Seller?
If you lose out on a deal due to a low appraisal, you may hesitate to put your home back on the market. Going through the whole process again with another buyer would likely result in the same situation unless you lower your price.
Fortunately, you can sell your home without enduring the hassle. With a sale-leaseback, also known as a rent-back agreement, you can quickly get fair market value for your property – in cash. Then, you can stay there as a renter while you figure out your next move.
Key Takeaways
Your home appraisal could come in lower than you expect for various reasons. Fortunately, a low appraisal doesn’t necessarily mean the end of your real estate deal. You may be able to get the value reassessed or negotiate a lower sales price with the seller.
Sources
1. CoreLogic. Appraisal Gap Increases in “Hot” Markets. https://www.corelogic.com/intelligence/appraisal-gap-increases-in-hot-markets/
2. The Mortgage Reports. What is a home appraisal? Home appraisal process and cost.
https://themortgagereports.com/39611/what-is-a-home-appraisal-and-why-do-i-need-one
3. Helpwithmybank.gov. What is a Reconsideration of Value (ROV) and who can request one?
https://www.helpwithmybank.gov/help-topics/mortgages-home-equity/appraisals/rov.html#
4. National Association of Realtors. What Agents Need to Know About Appraisal Reviews.
