Once you’re under contract on your home, you’ll need to have an appraisal done. An appraisal is a professional report that helps measure a home’s true and current market value. And honestly, any homeowner can get a home appraisal at any time, if they want to pay for one.
A homeowner refinancing their mortgage typically needs to get an appraisal, for example. But the most common time an appraisal is performed is when you’re selling your house. If the person buying your house is financing this purchase, the buyer’s lender will order an appraisal to ensure the house is worth the amount the bank is agreeing to finance for the buyer’s mortgage.
Typically the appraisal comes in right around the seller’s listing price, but sometimes you wind up with a low appraisal. This means that the appraisal comes back below the price agreed upon by the seller and buyer under the contract.
How is a house appraised?
When an appraisal is made, the lender the buyer is working with hires a third-party, licensed appraiser. The appraiser is typically chosen at random and cannot be connected to the transaction in any way or have any kind of relationship with the buyer or seller. The appraisal will happen sometime between when the house goes under contract and when it closes.
During the appraisal, the appraiser walks the property, somewhat similar to an inspection (but not the same, as below) with looking at both the interior and the exterior of the house, taking notes and pictures. After this on-site evaluation, the appraiser writes up a full report and combines their notes on the home’s condition with local valuation information and comp sales on other houses in the area. The resulting final document identifies the appraised value of the home.
What do home appraisers look for?
An appraisal, while similar to a house inspection in some ways, is not the same. While an appraiser and a home inspector may look at the same features of the home, an appraiser won’t necessarily test the functionality of the house’s systems, nor will they note specific items of concern that should be repaired if they don’t have a serious impact on the value of the house. The appraiser is more concerned with determining the overall condition of the home and its value in relation to the area.
Again, while they’re not looking for things that should be repaired just for repair sake, appraisers are looking at:
- Age and condition of the house – The newer the house, typically the better the condition. Conversely, often the older the house, the worse the condition. And so this may affect the value of the house.
- Amenities or special features – A wine vault, a swimming pool, hot tub, home theater, an artist’s studio, or a mother-in-law-style apartment. These are all features the appraiser will note for value purposes.
- Completed improvements and upgrades – If the seller has enhanced the home through various improvements, the appraiser will document these changes and calculate how those upgrades have affected the value of the home.
- Comp sales – The appraiser will run comparable sales in the area just like a real estate agent would for the buyer when creating a comparative market analysis on the home. They’ll look at recent sales of homes that are similar to the one the buyer is considering to determine value.
- Construction details – If the house is newer, most materials will be up-to-date already and validated by the walk-through, but the same process holds for the older houses too with the appraiser checking the status of modern materials in the home, new appliances and counters, new insulation, energy-efficient windows, and so on used to update the value of the home.
- Local housing market – An appraiser will consider the local real estate market, not just in your area, but in the city in general. Are home sales prices rising or falling, how long are houses taking to sell, is it a seller’s market or a buyer’s market?
- Location – School district ratings, restaurants, parks, shopping, and walkability to those things along with other nearby amenities, and proximity to major metro areas and public transportation. These are all things considered by the appraiser for their report.
- Lot size and zoning – Lot size or lack thereof can definitely affect the value of the home. Zoning can also provide additional value, if there are additional available opportunities for the property on which the house is built.
- Needed repairs that impact value – Damaged roof, basement water damage, termite issues. These are some common items that can affect the value of the house.
- Size and square footage – The appraiser will determine a cost per square footage for the house based on the usable living space of that house.
Why do low appraisals happen?
There are many reasons why low appraisals can happen, but here are a few of the most common reasons.
Seller’s market – In a seller’s market where there are more buyers creating greater demand than inventory of houses available to buy, multiple offers from multiple buyers on homes can often drive artificially inflated sale prices for homes higher than realistic appraisals can support.
Buyer’s market – In a buyer’s market where there is more inventory of houses available to buy than there are buyers, especially if this is a recent change, sellers may mistakenly overprice their home because they’re not aware of how much much their home value has decreased.
Poor evaluation of the house – If an appraiser fails to take note of important upgrades or popular local features of the house and doesn’t think the artist’s studio, additional acreage, remodeled kitchen or other upgraded amenities are important additions, these things can most definitely influence the valuation of your house.
Poor evaluation of comps – Comparable sales for the house should be both recent and similar. They should also only be using sold homes, not homes that are currently on the market. If the appraiser doesn’t use comps that don’t make sense for this house, then this may affect your report.
What can sellers do after a low appraisal?
Now the seller has an idea of how the appraisal can come in lower than expected. Armed with this knowledge, let’s talk about what to do if this scenario occurs during the seller’s transaction.
Reduce the contract price
Possibly the simplest response to this situation is for the seller to reduce the price to meet the appraisal. Depending on how motivated the seller is to sell the house and what their ideal time frame is, this is a valid response. It’s disappointing to settle for less but on the other hand, there is something to be said for the bird (or in this case the contract) in hand.
The reality of mortgage lending is that the lender will not be willing to loan more money to the buyer than the value of the property. Something’s gotta give. For the sake of simple math, let’s say the property is under contract for $410,000, but the appraisal comes in at $400k. The seller has a $10,000 shortfall on their hands. They can ask the buyer to bring cash to the table to make up the difference (and in a competitive seller’s market, this may be a viable option), or they could offer to meet the buyer in the middle – lowering the price by $5k and asking the buyer to provide an additional $5k in order to close the deal.
Put the home back on the market
Every sale is unique, and while this is an option, this may not be the best way to combat a low appraisal. The seller can certainly hedge their bets – especially in a seller’s market – that the next buyer will have the funds to cover any difference between the list price and the appraisal value.
But – and this is important – they should be prepared to be in the exact same situation when the appraisal once again comes in below the contract price. And, this time, the seller’s house isn’t the hot new listing it once was. If the seller’s property languishes on the market, the seller may end up selling for less than the original contract offered, anyway. It may be in the seller’s best interest to make the original offered contract stick, even if it requires a compromise on the seller’s part to do so.
Challenge the low appraisal
The seller can challenge the appraisal with the lender or request a second appraisal of the property. If they choose this route, it’s important to understand that the seller does not hold the cards in terms of challenging the appraisal or ordering a second appraisal on the property. Whether or not this takes place is entirely up to the lender for the buyer, and a request of this nature can only come from the buyer – but not from the seller.
The seller should speak openly and honestly about their goals and willingness to press the issue of the appraisal with their real estate agent. Their agent should be able to negotiate this situation on the seller’s behalf. The seller should take some time and review the comparative market analysis with their agent. The seller may come to a clear agreement with the buyer about challenging the appraisal and still fail at the attempt if the lender does not agree to review or redo the appraisal, and since they are likely working with an experienced appraiser they know and trust, the likelihood that they will turn down this request is pretty high.
Be optimistic but realistic
Approach the sale of your property optimistically and with this caveat – the sale of your home is complete when the ink on the closing paperwork is dry, and not a moment before. The appraisal of your home is probably going to come in right on target, and your transaction will progress without a hitch. But remember, the road to a real estate closing is sometimes a bumpy one. Make sure you have an expert real estate agent working with you. The agents at Trelora can provide that unparalleled customer service you seek, because they have worked through all of these appraisal issues and more. You’ll be glad to have us along for the ride when you hit those bumps.