How to Deal With a Low Home Appraisal
Here are the action steps to take when your client gets a low home appraisal
Here are the action steps to take when your client gets a low home appraisal
Jacqueline Kyo Thomas
What's more stressful than buying or selling a home?
The answer is getting a low appraisal for the home in question. Low appraisals can be frustrating for all parties involved: the buyer, the seller, and you—the helpful and hopeful real estate agent who's trying to close the sale.
Up until this point, you may have done your job as a real estate agent perfectly. If you're working for the buyer, you've found a home that they love and are excited to purchase. Or, if you're working for the seller, you've successfully attracted a buyer who made an acceptable offer.
But then, after your client has signed the necessary paperwork, you get word that the home has appraised for less than the sales price that both the buyer and homeowner agreed to.
What happens now? If you represent the buyer, is the deal off? If you represent the seller, can you dispute the low appraisal?
In this guide, we'll answer those questions, explain why low appraisal happens, and also advise you on what to do if this happens to one of your clients.
The home appraisal process is part of selling a home. Lenders require that a home's true market value is assessed by an unbiased and licensed appraiser. An appraiser is a professional who inspects a property to determine how much it’s worth in today's market.
Lenders seek out and value the professional opinion of an appraiser. The lender will use the appraiser's valuation to determine how much they'll allow you to borrow.
A low appraisal happens when the valuation for a home comes in at a lower amount than expected.
Obviously, the goal is for the property to appraise for at or higher than the agreed-upon sales price. However, homes can and do appraise for less than the sales price.
For the buyer, it means that they won't be able to secure the financing to cover the complete purchase of the home. That's because the lender will not lend an amount that exceeds the appraised value for the home. The buyer will then have to make a difficult decision: Either go back to the negotiation table with the seller in an effort to get a sales price that matches the appraised value, or cover the difference between the sales price and the home valuation.
For the seller, a low appraisal means that they'll probably have to accept a lower sales price on their home, unless the buyer agrees to pay the difference. If the seller was anticipating a profit, this move will no doubt reduce the money the homeowner makes on the sale. It can also cut into your commission.
A low appraisal is a blow to all parties involved.
As a real estate expert, you'll need to help your client navigate this process. They'll alternate between bewilderment and frustration, wondering why it happened and what they can do about it. The first thing you'll want to explain is why low appraisals happen. Then, you'll want to give your client options on how to respond.
So, when your client asks you why the home has appraised for less, you can share the most common causes of low home appraisals, such as:
Are homes in your area selling quickly?
In a hot market, homes sell faster than usual. However, because appraisers look at past sales to value homes, they may arrive at an appraisal that doesn't reflect the current market.
On the opposite side of the spectrum is a cold market, which is one that has fewer buyers and more inventory. Because it's a cold market, there are fewer sales, which translates to fewer comps. This may cause the appraiser to arrive at a lower value for the property.
Sometimes, the seller has an unrealistic opinion of how much their home is worth. Perhaps they invested a lot of time and money into remodeling the space and are hoping to get a return on their investment. But the appraiser may not recognize this as an added value.
Your appraiser may be new to the job and inexperienced with the appraisal process. Everyone has to start somewhere, and that somewhere may be on your deal. This inexperience can lead to an undervalued home appraisal.
The appraiser may also not have knowledge about the local area, which can affect the home valuation.
The home's location can affect its valuation. If the neighborhood is rundown or filled with foreclosures, it can cause the appraiser to devalue the home.
So what do you do if your client receives a low appraisal? There are different options available, depending on if they're buying or selling the property.
Renegotiate With the Seller You can advise the buyer to return to the seller and renegotiate the price of the home so that it matches how much the home was appraised for.
Make Up the Difference Advise the buyer to increase their down payment so that they can make up the difference between the appraisal and estimated value. This is a good option if the appraisal and sale price aren't too far apart.
Cancel the Contract Since there's always a chance that the home will appraise for less than expected, you've probably added an appraisal contingency. So you can advise your buyer client to cancel the contract if they can't renegotiate the price and the price difference is too much to pay out of their pocket.
Ask the Appraiser to Reconsider You can always challenge the appraiser's assessment. They're human and that means they can make mistakes.
Consider Selling at a Lower Price If the appraisal and sales price aren't too far off, advise your client to take the new offer, even if it's at a loss. It's often better to go with a sure deal than to restart the process.
Challenge the Low Appraisal If you feel like the appraisal is not accurate, you can advise your seller client to appeal the appraisal. We'll discuss how to do that in the next section.
Pull the Home Off the Market You can also advise the homeowner to wait for a comparable property to sell before they list their home. This way, the appraiser will have a recent comp before you relist their property.
What if you represent the seller and they want to challenge the appraisal report? Here's how to dispute a low appraisal:
First, request a copy of the full appraisal. This way, you can review the data and check for errors about the property, such as missing features.
Then go over the comps. Take a look at which homes the appraiser used as comps. Are these true comparables in terms of square footage, features, neighborhood, and condition? If not, why?
Ask for another appraisal. If you can effectively challenge your initial appraisal based on your own market research, petition the lender for a second appraisal.
Finally, you can advise the homeowner to hire their own appraiser. While hiring an appraiser will cost the seller money, doing so may vindicate their asking price.
However, a second appraisal may return the same value or even less. Plus, getting a second opinion from a different appraiser probably won't alter the stance of the buyer's lender. They'll likely trust their own appraiser over your seller's “unvetted” one.
The home selling/buying process is full of obstacles. One of the biggest problems you'll face is a low appraisal. However, by implementing the above tips, you can recover from a low appraisal and get the home sale back on track.