For the vast majority of home sales, the buyer seeks financing from a bank. In that case, the lender will require an appraisal of the property, and the fair market value must match or exceed the amount of the loan. If the home appraisal comes in low, that can potentially put the deal in jeopardy.
We spoke with some trusted appraisers and real estate agents to find out how often the appraised value falls short, some of the reasons it may come in low, what to do in that circumstance, and how a homeowner can proactively prevent that dreaded value gap in the first place.
How often do home appraisals come in low?
Curt Stinson, a top real estate agent from Prima County, Arizona, says that most of his listings appraise at or above the contract price — only about one in 10 properties, or 10%, miss the mark.
John Brenan, chief appraiser at Clear Capital, a Nevada-based financial services firm, echoes that 10% estimate. Certified general real estate appraiser Mason Spurgeon estimates that about 20%, or one in five appraisals, come in lower than the sale price.
Ever wondered whether appraisers know the selling price when they evaluate a home? In most cases, they do — according to the Uniform Standards of Professional Appraisal Practice (USPAP), “an appraiser must, if such information is available to the appraiser in the normal course of business, analyze all agreements of sale, opinion, and listings of the subject property current as of the effective date of the appraisal.”
“It’s always a good idea to give the appraiser the sales contract,” says Spurgeon. “There are times when the sale price and contract are withheld from us because they fear that the appraiser will use it as the basis for the appraisal, but this is not typical. A good appraiser will only analyze the contract and search for sold/closed market sales to complete their opinion of value.”
How accurate are home appraisals?
“Ultimately, an appraisal is an opinion of value, based on data obtained from the marketplace and analyzed by an appraiser,” says Brenan. “Because appraisers are required to be independent, impartial, and objective, and to analyze data from the marketplace, their opinion of value might differ from what a highly motivated buyer is willing to pay.”
He offers the example of a buyer who may fall in love with a property because it reminds them of the home they grew up in, or because it has the dream kitchen they’ve always wanted, and therefore may be willing to make a higher offer than most other buyers. But the appraiser won’t have that emotional reaction to the home, and may not believe that its fair market value supports the price the buyer is willing to pay.
Spurgeon also points out that appraisals are only as good as the data used in the analysis. “An appraisal is the value of a property as of a specific date and time, but the value for real estate is always changing,” he notes. “As soon as another property sells in the neighborhood, your property value could have gone up or down.”
Main reasons for a low home appraisal
If an appraisal comes in below the sale price, it’s likely due to one of these common causes:
Property upgrades aren’t worth what the seller thought
Stinson sees this as the main reason for an appraisal coming in below the contract price. For instance, if you spent $100,000 putting in an upscale inground pool, that upgrade could help nudge the buyer toward making an offer at list price—but if the appraiser decides that pool is only worth a $20,000 boost in the home’s value, the deal could go off the deep end.
“We’ve all heard the old cliché, ‘don’t over-improve for the neighborhood,’ and there’s some truth to that,” says Stinson. “Depending on the surrounding homes and comps, the appraiser will only give you so much, no matter how much you’ve invested in upgrades.”
High demand for the home
If a property has unique features that are hard to find in any given area, it could cause a spike in offer prices, or even start a bidding war. While this might seem like a good position for a seller to be in, the appraisal ultimately might not measure up to those escalated offers, potentially putting the deal in jeopardy.
Rachel Massey, Chief Appraiser at Massey & Associates Valuation Services in Saline, Michigan, says a home’s value is sometimes deemed to be lower than the sale price due to a lack of adequate research, which is most often driven by tight turnaround times.
“In this modern age of instant mortgages and instant ‘values’ from computer applications, often users cannot understand the need for the appraiser to do extra due diligence and research that will lead to a more supported opinion,” she explains.
“Bad” data or appraiser is unfamiliar with the market
If an appraisal comes in erroneously low, it could be due to an appraiser using poor comparable sales data or just not being competent in the market, notes Spurgeon. “Some banks will engage appraisers who are from out of the area and don’t have access to the local sales data,” he says. “In that case, the appraiser is forced to use data that is fed to them from other sources, and may or may not be correct.”
Not using a real estate agent
According to Spurgeon, one of the main reasons for a disparity between appraisal and contract is neither the buyer nor the seller using a real estate professional. “If the buyer or seller employs a realtor or an appraiser in their transaction, the sale price and market value are typically in line,” he says.
What to do if a home appraisal comes in low
So you’ve received the bad news that the appraiser’s opinion of your home’s market value doesn’t support the contract price. Does that mean the deal is dead? Not necessarily.
Stinson estimates that when an appraisal comes back low, he is able to find a solution and complete the transaction about 75% of the time.
Below are some of the options for handling this scenario:
The buyer can make up the difference.
Obviously this isn’t ideal for the buyer, but if it’s important enough to them, they can pay the difference out of pocket. Spurgeon has seen this happen in scenarios where the buyer really wants the property or the market is on a quick upward trend and is moving faster than the sales.
The seller can reduce the price.
If you’re highly motivated to close the deal, you can opt to lower the contract price to meet the appraised value.
The buyer and seller can work together to close the gap.
If both you and the buyer are motivated to make the deal happen, you may choose to split the difference between the sale price and the appraisal amount.
The seller can challenge the appraisal.
If you and your agent disagree with the result of the appraisal, you can request that the buyer get another appraisal, or you can order your own. “Another option is to collect comparable sales data that was not used in the appraisal and present that to the buyer, lending institution, or appraiser,” says Spurgeon.
The parties can choose to walk away from the deal.
“Ultimately, I would recommend not giving up until you get a hard no, but remember that an appraiser is not likely to change their value without new data or comparable sales,” Spurgeon says.
Tips to prevent a low home appraisal
Of course, the best and easiest scenario would be for the appraisal amount to meet the contract price from the start, without requiring any finagling. The experts offer these tips to help ensure that you get the number you need.
Establish a reasonable list price.
Brenan points out that while agents will typically review the market data with the seller to establish a reasonable list price, in some cases they will agree to list a home at a higher price. In such cases, if the seller is fortunate enough to find a highly motivated buyer and receive an offer, that scenario could result in the appraisal coming in below the sale price.
“If a home is priced in line with the market and an offer is accepted, the chances are very good that the appraisal will not come in below the sale price,” says Brenan. “The accessibility of consumer-facing data and price estimate tools gives sellers a great opportunity to get up to speed on what a reasonable range might be for listing. The seller should work with the listing agent to set a price supported by the marketplace.”
HomeLight’s Home Value Estimator can also be helpful in determining an appropriate sales price for your home. It uses information from multiple sources to create a real-time home value estimate based on current market trends.
Make sure your home is in prime showing condition.
Although appraisers should rely primarily on market data, they’re also human beings who, like buyers, are influenced by first impressions. Stinson recommends taking the same steps as you would when preparing your house to list or show: clean and declutter, make any necessary repairs, remove any pets, and improve the curb appeal.
Provide a list of improvements.
Highlighting those new kitchen fixtures, a recent paint job, or a newly installed patio can help ensure that the appraiser doesn’t miss any potential value-boosters. “In the list, include a description of the improvements, the cost, and the date completed,” suggests Spurgeon. “This will give the appraiser a good idea of the effective age of the home, which you want to be much lower than the actual age.”
Call out and explain any problems.
Think the appraiser won’t notice a leaky faucet or a broken dishwasher? Think again. It’s never a good idea to try to sweep any issues under the rug and hope the appraiser doesn’t notice.
“Appraisers are professionals who inspect hundreds of homes a year, so always be honest and courteous, because they will know if you are telling the truth or not,” says Spurgeon. It’s best to point out any problems and explain anything you’ve done to remedy them. Even better, he suggests having a bid available to give the appraiser so they know how much the problem will cost to repair.
In summary, to avoid a low appraisal:
- Work with your real estate agent to set a reasonable listing price.
- Make sure that your home is well-maintained and primed for showing.
- Convey any improvements or required repairs to the appraiser.
Take care of these items and you’ll be in a much better position to get the appraisal value you need for a smooth sale. And if you do find yourself facing the dreaded value gap, know your options and seek guidance from your agent to determine whether the deal can be saved.
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