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How to Deal With a Low Appraisal When Selling in a Hot Market

At HomeLight, our vision is a world where every real estate transaction is simple, certain, and satisfying. Therefore, we promote strict editorial integrity in each of our posts.

A rapid increase in home prices over the past year-plus has created a larger disconnect between real estate contracts and appraised values than normal. NAR statistics show that appraisal issues in June 2021 accounted for 25% of delayed contracts and 13% of terminated ones, compared to the respective 18% of delayed and 9% of terminated contracts caused by appraisal issues in a more typical year.

“Since about March 2020, we have had exceptionally aberrant and unpredictable market conditions,” says Mike Ford, a general certified real estate appraiser in Southern California since 1986 and a member of the American Guild of Appraisers. “Most appraisers across the country are reporting frequently unsupportable sale prices.”

While it’s so rewarding to receive a high offer on your home, dealing with a low appraisal when selling a house can be stressful. Unfortunately, you can’t wave a magic wand to change your appraised value. That said, you can take steps to help reduce the odds that a low appraisal causes a settlement delay or derails the deal altogether. Follow these 5 recommendations from real estate experts we spoke with firsthand to address the risk of a low appraisal in today’s hot seller’s market.

Source: (Watchara Ritjan / Shutterstock)

1. Don’t go wild with your asking price.

To help arrive at a fair asking price, your real estate agent will perform a comparative market analysis, or CMA, which evaluates raw data and qualitative characteristics about your home against about 10 recently sold or active properties similar in location, square footage, age, and lot size, among other factors. The goal of this review is not only to determine what a buyer would pay for the property but also to get as close as possible to what an appraiser would value it at.

“It’s my job to try to get [the price] right the first time,” says Greg Clark, a top real estate agent in the Waco, Texas, area. But the current market does pose challenges when collecting comps. “There’s so much going over the asking price that from an appraisal standpoint, I hope that I pull the same properties that the appraiser is going to pull,” Clark shares.

Using what’s called the comparison approach in the appraisal world, appraisers will usually look at comps as well and pair those insights with an onsite visit to arrive at their conclusions about the home’s worth.

“We don’t set values or make values,” Ford says. “The market does that, and our job is to consider all aspects of it including situations where auction or panic buying or forced motivations reflecting abnormal transactions occur. Even when such events become widespread.”

As a general rule, Ford advises not listing a house more than 5% above its most probable selling price under stable market conditions. “Some local increases may be supportable by recent sales. In most extreme cases, they won’t be,” he adds. For instance, a house in good condition selling for $350,000 in January does not “magically” and credibly become worth $450,000 to $500,000 in June of that same year.

2. Request an appraisal waiver from buyers who bid high.

Once you and your agent are on the same page about the maximum price your home is likely to appraise for, you can negotiate with buyers accordingly. If you’re concerned about a low appraisal with one or more offers you receive, ask buyers to include an appraisal waiver as part of the contract.

If a buyer is using a mortgage to purchase the home, the lender will still require an appraisal. However, an appraisal waiver is basically a promise from the buyer that if the appraisal comes in under contract value, they will bring the funds to the sale to cover the gap. With an appraisal waiver, the buyer may agree to pay costs up to any amount or they may cap it at a certain dollar figure to remain within their comfort zone.

“The Houston market is gaining traction and we are seeing many homes listed and sold within one day with multiple offers,” top real estate agent Susan Brock shares with HomeLight. “Appraisal waivers (partial or full) are becoming more commonplace. For buyers that do not have much in the way of cash reserves — that is becoming a roadblock to homeownership.”

A person using a phone to deal with a low appraisal on a house.
Source: (Jacob Townsend / Unsplash)

3. Temper your expectations for a reconsideration of value.

You and the buyer can work with a lender to submit what’s called a reconsideration of value to the appraiser if you or your agent believe the appraised value appears wildly off. However, asking an appraiser to reconsider their value to a huge degree because of market conditions alone likely won’t get you far.

Appraisers abide by the Uniform Standards of Professional Appraisal Practice, the ethical and performance standards for appraisers nationwide, Ford says. While this doesn’t require perfection, many state regulatory agencies now enforce fines over any error, technical or otherwise, which causes some appraisers to feel and act as if any error is a potential threat to their license.

An appraiser might recheck their data or conclude a property is worth a range of value if their calculations arrive within 2% of the contract price, but they won’t be able to justify a disparity of 20%, according to Ford. “No appraiser can or should conclude above their supported range. It’s simply not defensible,” he adds.

Clark notes that current market conditions in his area also make contesting an appraisal difficult. The appraisers in his area are “probably carrying 65 or 70 jobs at any given time; they’re doing five a day, and they’re working seven days a week,” he says. “The true likelihood that we’re going to get a significant change in value is pretty low.”

4. Get a pre-listing appraisal for further proof of your home’s value.

As discussed above, your real estate agent should be doing everything in their power to give your property the best shot of appraising. They do this by supporting your asking price with a thorough CMA and helping you craft the best contract with a buyer.

However, you can also opt to get a pre-listing appraisal to firm up your pricing strategy even further. This step can help you lock in an asking price and make sure you’re spot-on in valuing the property, especially in a fast-changing market.

You’ll pay an average $450 to $550 for an appraisal, but Clark says the cost can be worth the peace of mind. “We can use that from a marketing standpoint as well,” Clark says. “That way, we don’t get buyers who are going to come in at some ridiculous number and then expect us to reduce the price when the appraisal hits. That happens quite a bit.”

Keep in mind, if you sign with a buyer who purchases the home with a mortgage, the lender will still require an independent appraisal. There’s no guarantee that your pre-listing appraisal will guarantee that the lender-ordered appraisal values the home at a certain amount.

A person walking away after receiving a low appraisal on a house.
Source: (Vidar Nordli-Mathisen / Unsplash)

5. No appraisal waiver? Prepare for difficult negotiations.

If you receive a low appraisal and didn’t request an appraisal waiver, you and the buyer will have to choose from one of a few main options:

  • The buyer can make up the difference with cash. (Again, because you don’t have an appraisal waiver, they’d need to agree to this in a separate negotiation — and there’s no guarantee they will).
  • The seller can reduce their asking price to the appraised value.
  • Buyer and seller can meet in the middle. The buyer brings some cash to cover the gap, and the seller agrees to lower the contract price to an extent.
  • If you can’t come to an agreement, either side can walk away.

This scenario can, in some cases, be worse for sellers than buyers. Because your buyer didn’t waive the appraisal, they can walk away from the sale with their earnest money deposit. Their exit would be covered by the appraisal contingency, which specifies that their offer is contingent on the home appraising at or above the agreed-upon price.

Sellers are nearly a month into the deal by the time the appraisal arrives, so bringing the house back to market at that point gives it “the perception of being damaged goods,” Clark says. “The buyer at some point feels like they’ve kind of got you over a barrel: ‘We’re a week from closing. You’re gonna dump me and start over?’ That’s a tough discussion.”

Header Image Source: (Felipe Dias / Unsplash)