Low Appraisal? What Buyers and Sellers Need to Know
You’ve found your dream home (or a buyer for your property), the offer is accepted, and then…the appraisal comes in lower than the agreed-upon price. This scenario, known as a “low appraisal” or “appraisal gap,” can derail a real estate transaction. This post will explain what happens when an appraisal comes in low and outline the options for both buyers and sellers.
Understanding the Appraisal Gap
A low appraisal means the independent appraiser has determined the fair market value of the property is less than the price the buyer and seller agreed upon. This is a problem primarily because lenders will only loan up to the appraised value (or a certain percentage of it, depending on the loan-to-value ratio).
Why Do Low Appraisals Happen?
Several factors can contribute to a low appraisal:
- Overheated Market: In a rapidly appreciating market, prices can sometimes outpace the data available to appraisers. Recent sales data might not fully reflect the current surge in demand.
- Lack of Comparable Sales: If there are few recent sales of similar properties in the area, it can be difficult for the appraiser to establish an accurate market value.
- Property Condition Issues: The appraiser might identify significant repair needs or maintenance issues that negatively impact the value.
- Over-Improvements: While some improvements add value, over-improving for the neighborhood (e.g., installing a luxury kitchen in a modest area) might not yield a full return on investment in the appraisal.
- Appraiser Error: While rare, appraisers can make mistakes. This is why it’s crucial to use a qualified and experienced appraiser.
Options for Buyers
If you’re the buyer and the appraisal comes in low, you have several options:
- Renegotiate the Purchase Price: This is the most common solution. You can go back to the seller and attempt to renegotiate the price to match the appraised value. The seller might be willing to lower the price, especially if they’re motivated to sell.
- Pay the Difference in Cash: You can cover the appraisal gap yourself by paying the difference between the appraised value and the purchase price in cash. This requires having sufficient funds available.
- Walk Away (Contingency): Most real estate contracts include an appraisal contingency. This clause allows you to back out of the deal without penalty if the appraisal comes in low and you can’t reach an agreement with the seller.
- Get a Second Appraisal: You can request a second appraisal from a different appraiser. However, the lender might not accept it, and you’ll likely have to pay for it yourself.
- Dispute the Appraisal: If you believe the appraisal is inaccurate, you can dispute it. This involves providing evidence to support a higher value, such as:
- Identifying errors in the appraisal report (e.g., incorrect square footage, overlooked features).
- Providing additional comparable sales that the appraiser might have missed.
- Highlighting recent improvements or renovations that weren’t fully considered.
- It is very hard to dispute and win.
Options for Sellers
If you’re the seller and the appraisal comes in low, your options are somewhat more limited:
- Lower the Purchase Price: You can agree to lower the price to match the appraised value. This might be the best option if you’re in a hurry to sell or if you’re concerned about finding another buyer.
- Challenge the Appraisal: You can work with your real estate agent to gather evidence and challenge the appraisal, similar to the buyer’s options above.
- Wait for Another Buyer: You can refuse to lower the price and hope to find another buyer who is willing to pay your asking price (or whose lender’s appraiser comes up with a higher value). This carries the risk of the property sitting on the market longer.
- Make Repairs: If the low appraisal is due to condition issues, you can make the necessary repairs and then request a reappraisal.
Tips for Avoiding Low Appraisals (Sellers)
- Price Realistically: Work with your real estate agent to set a competitive and realistic asking price based on comparable sales.
- Prepare Your Home: Make sure your home is in good condition and presents well. Address any obvious repairs or maintenance issues.
- Provide Information: Give the appraiser any relevant information about recent upgrades, improvements, or unique features of your property.
Tips for Avoiding Low Appraisals (Buyers):
- Make a reasonable offer. If you are bidding well over the asking price, that could be a problem.
The Role of Appraisal Partners
At Appraisal Partners, we understand the complexities of low appraisals. Our experienced appraisers are committed to providing accurate and well-supported valuations. We can also provide expert advice and guidance to both buyers and sellers navigating an appraisal gap.
