Is A Low Home Appraisal Common?
It’s not uncommon for a property to be appraised for less than the purchase price. Home appraisals come in low actually a lot because home buyers will often overpay for a property in order to beat out other buyers.
This article will briefly explain what a home appraisal is comprised of, how it is created, and what you should know on how to handle a low appraisal.
The National Association of Realtors (R) reports in its April 2018 Realtors (R) Confidence Index Survey that 18% of contracts with delayed settlements encountered appraisal issues. More importantly, of the 75% of contracts with settlement contingencies, 41% of those involved appraisal issues.
What Does An Appraiser Look For In The Market Analysis?
Determining the value of a property involves analyzing many different characteristics. An appraiser will take into consideration neighborhood sales, current listings, the condition of the property, the quality of any upgrades, the location, and bedroom and bathroom counts. An appraiser needs to identify the most similar comparable sales to help establish the value for a particular property. The appraiser can make any adjustments to the comparable sales based on differences and eventually arrive at a well-established value that makes sense for the neighborhood and the home being appraised.
It’s easy sometimes to think of all sales in the neighborhood as comparable sales, but a comparable sale is really a property that is actually competitive to the subject property. In other words, if the subject property was not available for sale, would a buyer consider purchasing the comparable sale as a replacement? Would a buyer substitute the comparable property if the subject property was not available?
That underscores the reality that not every neighborhood sale is actually a comparable property. For instance, if a 3,000 sq ft sale across the street sold for $400,000, and your house is 2,200 sq ft, that’s not a good comparison. That might explain why there’s an enormous price difference between your home and the sale nearby. It’s much better to find comparable sales that are closer in size to yours, have a similar location, a similar bed/bath count, and a similar level of condition and/or upgrades.
The Importance of Using Comparable Sales
If you use comparable sales to research home values beforehand, you’ll be less likely to have a situation where home appraisals come in low. You’ll also be able to identify homes that are overpriced and gain a good understanding of the market activity for your area.
This is why you should look at comparable sales data before making an offer on a home. Real estate agents refer to these as “comps.” These are similar homes that have sold recently in your market area. We’re not talking about listing prices here. Listing prices don’t reflect what the market will actually support. We’re talking about the final sale prices, which is the amount the homes sold for in the current market.
If you hired a real estate agent, they should have given you a comparative market analysis (CMA) when you were first deciding on a listing price, along with comps to prove your home’s value. Keep copies of the comps and give them to the appraiser when they arrive at the home.
This data will help you determine whether the listing price is realistic. Your real estate agent should be able to do this research for you. That’s what you’re paying them for. But you can also research it yourself by looking at recent sales on Zillow.com, or any other website that offers sales data.
If the appraised value comes in lower than the contractual purchase price, the buyer may be able to renegotiate the selling price so that it falls in line with the appraised value of the home. If the purchase contract doesn’t have an appraisal contingency, the buyer could be obligated to buy the home regardless.
In that case, the buyer will need to come in with extra money to make the deal work, which may require putting more money down and/or being subject to a higher interest rate on the loan. It’s possible that a second mortgage may be needed in order to make the deal work.
However, if the purchase contract did come with an appraisal contingency, the seller will need to work with the buyer to make things acceptable for all parties. If there’s an impasse, the buyer might walk away from the deal and collect their earnest money deposit. Typically the seller will work with the buyer to come to an agreement, although a huge gap in the appraised value and the purchase price could kill the deal completely.
Here Are Steps To Follow For Knowing How To Handle a Low Appraisal
You will want to carefully evaluate the data and other logistics used for how the appraised value was determined. A good appraisal will have all the data and analysis explained and supported within the appraisal. Explaining how an adjustment value was determined is more than just “stating” what an adjustment value is. A good appraisal should be fully supported, easy to understand, and credible.
Not all home appraisals are created equal, and the same is true with appraisers. While they are meant to be objective, they are still influenced by the human creating the report.
Look at the appraisal data and analysis.
Look for errors in the home appraisal.
As you examine the report, double-check the basic data (square footage, number of bedrooms and bathrooms) and how the appraiser described your home’s features.
Maybe the appraiser didn’t note that you have energy-efficient appliances and lighting. Extra amenities and features, although they may be small, can add up quickly to put a home in a higher “quality” classification. If there is an error, most appraisers will want to fix it, even if it doesn’t change the valuation of the property.
Another possibility is that the appraiser lacks sufficient skill and experience. Some people are not very good at their jobs. Other people are new at their jobs and do not have the experience necessary to do the task as well as it could be done. You may find yourself in a situation where the appraiser you are working with falls into one category or the other.
The appraiser may be in the wrong profession, or he or she may have appraised very few homes. You can do some research to determine if there is a problem with the appraiser, and you can request a different appraiser if necessary.
There are dozens of reasons why home appraisals come in low. Creating a high-quality appraisal is a skill that takes years to develop.
Keep in mind, though, that most of the time a low home appraisal is not due to a bad appraiser. Only request a different appraiser if you feel sure that the appraisal is grossly incorrect.
How To Request a New Appraisal.
If you were able to show that the first appraisal was problematic or inaccurate, the buyer can request a new appraisal from their lender from a more qualified appraiser. Ultimately this is up to the buyer since they will be footing the bill, although it is common to split this expense between the buyer and seller.
This option can be risky. Only the appraiser’s client, the lender, can demand a review of the appraisal, and only the buyer can request a review or a second appraisal.
Your lender and your agent can offer you advice as to whether the appraiser used the most relevant and comparable sales, and if they feel a value dispute is warranted.
If you and your real estate agent have done your homework and feel confident that the home appraisal was erroneous, you can challenge the appraisal with an appeal procedure known as an ROV (Reconsideration of Value). It is vitally important to have written analysis (not just a list of addresses) that clearly explain why home appraisals come in low. The more detail (including copies of the market data) the better. Few things are more irritating to an appraiser than having a lender submit a list of property addresses and telling the appraiser to research them.
I have had lenders send me a list of the highest sales in the market area, which had no similarities to the subject property at all. This wastes everyone’s time and puts a bad taste in the appraiser’s mouth, which doesn’t make him receptive to helping the lender. Ask direct questions and supply information that backs up your question or your claim to whatever you are asking. Virtually all professional appraisers will be glad to review data that is relevant and presented in a logical layout.
When the lender is asked for a second appraisal, or to order an enhanced review (broker price opinion/BPO or appraiser desk/field review) keep in mind that this can backfire, and the value could come in even lower after a more in-depth review.
Here is a summary of the most common reasons an ROV is performed;
1) Poor analysis of comparable properties (if some of the comps used were older sales, instead of including more recent sales).
2) Disregard of special financing or concessions
3) Miscalculation of gross living area (Gross living area, or GLA, is the finished living area that is above ground. Basement living area is analyzed and calculated separately from GLA).
4) You also want to look at whether the appraiser performed an adequate inspection.
In addition to the appeal route, you can file a formal complaint with the state appraisal board or the appropriate professional appraisal organization, if you believe the appraiser who evaluated the home wasn’t qualified.
Ultimately, if you’re not getting the value you want or need with one lender, you might consider taking the loan to another lender with the hope that they’ll come up with something different (higher).
Another Solution: Meet In The Middle
If both parties still want the sale to go through, it could make sense to split the difference, with the seller dropping the price a bit and the buyer adding cash to the down payment.
Remember, an appraisal is an opinion of value. Different appraisers may use different comparable sales to derive their value analysis.
Appraising homes is not a perfect science. There will always be variance, and with that comes options.
Put The Home Back On The Market
If the buyer can’t or won’t put more money down, and the seller is not interested in reducing the price, there is the option of taking a chance by allowing the deal to fall through and putting the home back on the market.
This can be disappointing to everyone involved. But if this situation happened because multiple offers brought the offer price above the asking price, then it might not be a bad way to go. The seller could get lucky and receive an all-cash offer. In that scenario, an appraisal won’t be an issue. Plus, even without an all-cash offer, another lender’s appraiser could have a more favorable point of view.
When considering scrapping the deal, don’t forget that at this point this home has been off the market for several weeks that could result in a detrimental effect to the market appeal, which would be putting an obstacle in the way and possibly making a successful sale more difficult to obtain. On the other hand, if the market activity has increased, the home might be noticed even more than it was during the earlier listing.
A Final Solution to Why Home Appraisals Come in Low
After all of this, if you feel that you’re just not getting the level of professional service that you should be, it may be worthwhile to go back to the starting point and reevaluate why you are not making the headway you think you should be. Sometimes, despite our best efforts, people just don’t connect completely and understand each other. Because this is likely the largest investment of your life, don’t be afraid to start over.
I have extensive experience as an appraiser (since 2001) as well as being a real estate agent (since 2007), and I offer free consultation services that may add some additional insight, or I may be able to answer questions that you may have. This is important, so don’t be afraid to speak up.
