A home appraisal is a critical step in the home buying and selling process, and it’s one that could make or break the deal for either side. For buyers and sellers, it’s important to know what an appraisal is, how an appraiser makes an evaluation, and how the outcome of an appraisal could affect your strategy in a real estate deal.
Things can get tricky when closing a deal, for both buyer and sellers.
A home appraisal is an expert opinion of a home’s value and it ensures the lender that their loan will be well-spent, or at least up to par with the agreed selling price. Since the buyer is borrowing from the bank, they will cover the cost of the home appraisal.
A home appraiser is a licensed professional who has completed the required training, apprenticeships, and exams to carefully and impartially provide opinions about the value of real property, according to the Appraisal Institute, the world’s leading organization of professional real estate appraisers.
That means your appraiser is not going to give a low estimate because they didn’t like your furniture, or the paint color on the kitchen walls. But rather, according to the Appraisal Institute, appraisers assemble a series of facts, statistics, and other information regarding specific properties, analyze this data, and develop opinions of value. The appraisal may also include recent sales information for similar properties, the current condition of the property, and the location of the property insight as to how the neighborhood impacts the property’s value.
If the house appraisal comes in less than the agreed-on price, you could be left to make up the difference out of pocket, since lenders approve loans based on the appraised value, not the contract price. It’s possible the sellers will drop the price to match the appraisal. After all, if the appraisal was already low once, it could very well appraise low again. Here’s what you need to know about all the ins and outs of the appraisal process.
Understand what you can’t do. If you’re unhappy with an appraiser’s valuation, unfortunately, there’s not much you can do to change the actual outcome. “Appraisers have to follow strict guidelines prescribed by Fannie Mae and lenders,” says Peter Grabel, a Connecticut agent. “There is a database that all secondary market appraisals go into, called Collateral Underwriter, or CU, that runs the appraiser’s report against a huge database of past appraisals and market data to confirm the findings are accurate,” says Brian Koss, executive vice president of Mortgage Network. “It’s a very regimented process.”But, this strict and thorough process benefits buyers by preventing appraisal fraud, such as lenders pressuring appraisers to inflate the home’s price so that a deal can be made. But some appraisers, to avoid being accused of this deceptive practice, appraise lower than they probably should. Ideally, homes should appraise at their true market value. And although you can’t influence the appraisal amount, you aren’t powerless.
Know the neighborhood comps. You can take the seller’s word that the house you want is worth what they say it is. But, it’s always good to know what comparable homes in the area have recently sold for. “Ask your agent to show how they arrived at valuing the house so you can justify your offer price,” says Koss. If there are low comps in the area from short sales or foreclosures, for example, the appraisal could come in lower than your offer. Help guard against this by having your agent ask the lender to use a local appraiser who would be more likely to know the value of the home you want to buy.
Speak with the appraiser before the report is made. Why not request that your agent be on-site when the appraiser is there? “Your agent should provide printouts of recent sales (both on-market sales and off-market sales) that justify the purchase price,” says Joseph Montemarano, a California agent. If your agent can’t be there, at least have them communicate with the appraiser.“Communication is key,” says Peter Grabel. “If the agent is aware of any concerning issues, [they can] provide information to the appraiser before the report is generated.” Maybe the appraiser doesn’t know about the mold issue in the nearby home that just sold or the divorce that led to a quick sale, causing those comps to be lower.
Recognize the reasons for low appraisals. Use your knowledge of the area to inform the appraiser, who might not be aware of local factors as intimately as you are. Here are some issues that account for low appraisals, says Grabel:
- Home prices in your area are increasing so quickly that the comps that sold six months ago don’t yet reflect this improvement.
- There aren’t adequate comps in your area, so the appraiser referenced comps from a less desirable community.
- The house you want has a much better view than the house that sold down the street, which overlooks power lines.
- Your house has a beautifully finished basement with a bedroom and bathroom. (Appraisers are required to use a lower value per foot for space below grade.)
- Your house has a pool or high-end landscaping, which didn’t lead to a higher appraisal.
Look at the appraisal report and ask about a revaluation if warranted. You have the right to see a copy of the appraisal report. Look it over as carefully as you look over your credit card statement each month. (You do that, right?) “If it has been found that errors or omissions exist within a report, it should be and will be corrected,” says David P. Anzueto, vice president of Atlantic Coast Mortgage LLC. “And perhaps the result is, in fact, a higher value.”If the house doesn’t appraise somewhere in the vicinity of the price you and the seller have agreed on — despite your efforts — you can ask for a revaluation. This tactic isn’t always easy to do and will cost you another appraisal fee.
Don’t panic. Remember to stay calm, assess the situation, and let your agent walk you through the process.
An appraisal lower than the agreed price can easily happen in a competitive market, where houses frequently bring in multiple offers. On face value, multiple offers are good news for you, the seller. They often mean getting more than your original asking price. For the seller, multiple offers can feel like winning — and they are.
Until your agent calls to tell you the appraisal came in below the agreed-upon sales price. Whomp, whomp, whomp.
The good news is that a low appraisal doesn’t have to be a deal killer. Having a knowledgeable agent at your side can make all the difference when it comes to bouncing back from a low appraisal.
Reduce the price of the house to the appraised value. As the seller, you can always sell the house at the appraised value without negotiating with anyone. This is the fastest way to “recover” from a low appraisal, but it could mean leaving money on the table. (And that’s always hard to swallow.)
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. For example, if the difference between the sales price and the appraised value is $10,000, the seller could lower the price by $5,000 and get the buyer to bring another $5,000 to closing. This solution depends entirely on the relative willingness and financial positions of the two parties.
Challenge the appraisal. This option is a bit of a long shot. 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. As the seller, you can support the buyer in this effort by sharing the competitive market analysis that you received from your agent or by giving her the results of an independent appraisal, if you have one. You also can offer to split the cost of a second appraisal if the lender agrees. This route has long odds because the decision is ultimately up to the lender, and the lender doesn’t have the same investment in the transaction that the buyer and seller have. If the lender doesn’t have a compelling reason to doubt the appraisal, then that tends to be the end of the line. (In my experience, only a small percentage of these requests are granted.)
Put the house back on the market. If the buyer can’t or won’t put more money down, and you’re not interested in reducing the price, you can take your chances by allowing the deal to fall through and putting the house back on the market. This can be disappointing to everyone involved. But if you’re in this situation because multiple offers brought the offer price above the asking price, then it might not be a bad way to go. You could get lucky and receive a cash offer when your agent relists the home. In that scenario, the appraisal won’t be an issue. Plus, even without the cash offer, another lender’s appraiser could have a more favorable point of view.When considering scrapping your deal, don’t forget that at this point your house has been off the market for several weeks and you’re putting yourself that much farther from a closed sale. This is where your agent is especially helpful. Your agent understands what the market is doing and can clarify your options so you can make the best decision for that moment. You might also have other options, as rules vary from lender to lender and from state to state.
Stay calm. The hardest tactic is also the most simple — above all, stay calm, look at the facts, and let your agent do the negotiating.