Appraisals are an essential step in many real estate transactions. Whether you are planning to purchase a property, refinancing it, or are waiting to settle an estate or a divorce, you are eagerly waiting for a report that will define the next steps or even the feasibility of your project. Unfortunately, in some cases, you may end up getting disappointed in the results with the appraisal coming back later than expected.
A low appraisal can jeopardize your real estate project. If a mortgage is involved – when buying or refinancing a property, for example – then the loan is typically subject to the property’s appraised value: the lender will not approve a loan higher than the report. If the number you receive is lower than what you need, you may be wondering what you can do to salvage the transaction.
Here are some options you should explore if your appraisal comes in low.
What is an appraisal?
An appraisal is an opinion of value provided by a licensed or certified real estate appraiser regarding the property’s current market value. The appraiser uses several valuation methods to determine what the property is worth
- the sale comparison approach (comparing the property to what other similar properties have recently sold for)
- the cost approach (how much would it cost to build a similar property, including depreciation), and
- the income approach (how much income could the property produce.)
An appraisal is the most accurate way to determine the value of the property since appraisers are unbiased professionals with no involvement in the transaction.
Why did my appraisal come in low?
There are several reasons why your home appraisal may have come in lower than expected.
The market overall has a significant influence on property values. The market may have declined in their area, bringing the property value down. On the contrary, property values may go up rapidly, and buyers offer high prices to secure a home in a competitive market. However, since appraisers must use past sales, appraised values may be lagging.
Property owners have – understandably – great pride in their home and may feel offended by a low number. However, they are not always objective. They may also overestimate the market value of some of the features in their home. For example, it is often the case if they have “the best house in the worst neighborhood.” There could also be some deferred maintenance that contributes to a negative impression of the property.
Finally, the appraiser may have made a mistake in their report. They may be using comparables that are not appropriate or missed recent sales or could be lacking knowledge of the local real estate market, including which neighborhoods are the most desirable. The appraiser may also be using sales below market value, such as foreclosures or short sales. Or, perhaps they’ve missed some essential information on the subject property.
The good news is that you can have access to the report (you may need to ask your lender for a copy) so you can check the comparables used and the reasoning behind the number obtained if you have any doubts.
What can I do if my appraisal comes in low?
Ask for a copy of the report
If you have any doubts regarding the results of an appraisal, your first step should be to request a copy of the report. It should include the comparables the appraiser used to determine the value, the adjustment they made to come to the value, and a detailed explanation of their reasoning to reach their conclusion. In some cases, you may understand why the appraisal came in lower than expected. You may also notice that the appraiser neglected some essential elements, either about the property itself or the comparables used.
If you have a real estate agent, they should provide some essential information about other recent real estate transactions in the area that could affect the value of your property. For example, they may know that one of the properties used as comparable is in terrible shape, something the appraiser may not be aware of. They are also an excellent resource to find alternative comparables supporting your higher opinion of value if necessary.
Submit a reconsideration of value
If you think that the appraiser made a mistake in their report, you can request a reconsideration of value (ROV) through your lender by pointing out specific errors on the appraisal. You may send your lender an email, a letter, or request an ROV form if they have one, but you may NOT contact the appraiser directly. You (or your real estate agent) will need to do some homework to find three to four comparables supporting your claim and make a list of any discrepancies in the report, such as the condition of the subject or the comparable, neighborhood values, and so on.
The original appraiser will receive the ROV. Depending on whether they agree with your findings or not, they have two days to update their report or to explain why they reject it.
Ask for a second appraisal
If your reconsideration of value was rejected, but you are not convinced by the appraiser’s explanations, you can ask your lender for a review. The procedure varies depending on the lender. Depending on the situation, it could be a desk review (another professional examine the report provided for mistakes). It could also be a field review from another appraiser (a new appraiser will visit the property to form a second opinion.) These reviews come at no additional cost to the buyer.
In some rarer cases, you may need to get an entirely new appraisal from another appraiser. However, this procedure comes with a caveat: if the new appraiser finds that the property value is lower than the initial appraisal, the lender will likely use the lowest number.
Renegotiate with the sale price
When faced with a low appraisal, buyers and sellers are often distraught. Most home sales are subject to the property appraising at or above contract price since the mortgage lender will not authorize a loan for a property valued lower than the approved amount. Therefore, the deal cannot move forward.
The sellers may be willing to renegotiate the sale price down to the lower appraised price to avoid losing the deal and listing the property again, especially since they may encounter the same issue down the road.
Offer the difference in cash
In a hot real estate market where the inventory is limited and cash offers are common, home sellers may be willing to try their luck rather than lower the sale price. If you the buyer are unwilling to lose the property and have the means, you can also try offering to pay the difference between the contract price and the market value as determined by the appraisal.
Back off the deal
As distressing as they may be, low appraisals can also serve as protection against a bad decision that could pursue you for many years. Sometimes, the right thing to do is to walk away from the deal. Overinflated appraisals were one of the reasons behind the 2008 house crash. The strict rules surrounding appraisals were set up to avoid a similar scenario.
It is easy to get caught in the moment when dealing with the current real estate market, where bidding wars and offering prices far above the listing price are common. Low appraisals are the occasion to reflect and take a step back if needed.
After graduating with a Master’s degree in marketing from Sciences Po Paris and a career as a real estate appraiser, Alix Barnaud renewed her lifelong passion for writing. She is a content writer and copywriter specializing in real estate and finds endless fascination in the connection between real estate, economic trends, and social changes. In her free time, she enjoys hiking, yoga, and traveling.