What is an Appraisal?
A home appraisal is an unbiased, professional opinion of a home’s value. A licensed appraiser develops this type of report based on key factors such as: square footage, location, and amenities. Then, borrowers or banks can understand the value of the property, thus granting the loan amount for the buyer.
In essence, the appraiser tells the bank what the home is worth so the home can be used as collateral if you were to default on your mortgage.
Contingencies on Appraisals
In some cases the home does not appraise, meaning the listed price for the home is not worth the value set forth by the appraiser. This is more common than you may think.
If a home does not appraise it can delay, or even stop, the real estate transaction.
Common Reasons for a Low Appraisal
Here are some common reasons for low appraisals:
A Sellers Market
This may occur when home inventory is low. Sellers have many buyers to sell to, and therefore can stretch the price of their home.
A Buyers Market
On the contrary, if there is too much inventory on the market, sellers may not understand that their home value has decreased.
An inexperienced appraiser may not understand the total value of the property and therefore value the home less. Moreover, an inexperienced appraiser may use poor market comparisons. Market comparisons (comps) help appraisers understand what is being sold in the area and for how much. Comps should be as similar and recent as possible.
What To Do Next
You may be concerned if the appraisal comes in too low. However, it is not always a bad thing. Sometimes, this can help save you money. Here are your options if your appraisal comes in low.
Renegotiate the Sales Price
If the seller is willing, you can renegotiate the sales price lower to meet the appraisal value.
Pay the Difference in Cash
If the seller is not willing to renegotiate, or you really want the home, you can pay the difference in cash.
You might be able to meet the seller in the middle of the difference. For example, if the home is listed for $250,000, the house appraises for $240,000, that means the difference is $10,000. The seller might be willing to lower the price to $245,000 so you only have to come up with $5,000 instead of $10,000.
Appeal the Appraisal – Request New Appraisal
As the buyer, you can request the lender appeal or dispute the appraisal if you believe bad comparisons were used. This will reorder the appraisal and a new appraiser will come out to evaluate the property. However, this process is not as easy as it seems.
You can dispute a low appraisal but there is a very specific process. When you dispute an appraisal you have to provide comps you feel are better choices that the appraiser should have used, along with any additional information to support the value you are trying to achieve. If the appraiser agrees with you and decides to use your information they will update the current appraisal. Lenders do not just simply reorder a new appraisal.
On a side note, FHA appraisals stay active for six months which means any buyer after you that is doing an FHA loan would be subject to that same appraisal on file as well.
Cancel the Contract
If all else fails, you can cancel the real estate contract.
A low appraisal is not necessarily the end of the deal nor a bad thing. You Realtor can guide you on next steps if a low appraisal occurs. Furthermore, they may have better insight into the value of the property.
Thank you to Crystal Brady for this blog idea!