Do Appraisals Usually Come In High or Low?

A property appraisal is an independent, professional opinion of a property’s value, performed by a licensed appraiser. This valuation is crucial in real estate transactions, including buying, selling, or refinancing a home. Lenders often require an appraisal to ensure the property’s value supports the loan amount, thereby protecting their investment. Understanding whether appraisals come in high or low is a common concern.

Common Appraisal Outcomes

Appraisal outcomes vary significantly based on market and property-specific conditions. The appraisal process objectively assesses value, comparing it against the contract price. This comparison leads to three primary outcomes.

An appraisal “at value” occurs when the appraiser’s estimated value matches the contract price. This confirms the purchase price aligns with the property’s market worth, allowing the transaction to proceed without financial adjustments. For instance, Fannie Mae indicates that a majority of appraisals confirm the contract price.

When an appraisal “above value” occurs, the appraiser determines the property is worth more than the contract price. This provides immediate equity for the buyer, as they purchase the home for less than its assessed value. While beneficial, this scenario does not alter the loan amount; lenders only finance up to the contract price.

Conversely, an appraisal “below value” means the appraiser’s estimate is lower than the agreed-upon contract price. This presents challenges, as lenders base their maximum loan amount on the appraised value, not the higher contract price. CoreLogic data suggests approximately 8% of home appraisals come in below the contract price, though this percentage can fluctuate with market conditions. Fannie Mae notes that low appraisals are more common in markets experiencing frequent bidding wars or rapidly rising prices.

Key Factors Influencing Appraisal Value

Several elements shape a property’s appraised value. Appraisers adhere to industry standards, such as the Uniform Standards of Professional Appraisal Practice (USPAP), which promote impartiality and ethical conduct in their assessments. These standards guide appraisers in developing and reporting their analyses, opinions, and conclusions.

Market conditions play a significant role in valuation. Supply and demand dynamics, prevailing interest rates, and overall economic stability directly impact property values. In a market with high demand and limited inventory, prices may rise quickly, potentially leading to a gap between contract price and appraised value if comparable sales data lags behind rapid appreciation.

Comparable sales, or “comps,” are a primary factor in an appraisal. Appraisers select recently sold properties similar to the subject property in size, age, condition, and location. They look for comps within a specific radius, often within one mile, and recent sales, typically within 3 to 6 months. Appraisers adjust the sales prices of these comparable properties to account for differences from the subject property, such as variations in features, condition, or lot size. These adjustments can be positive or negative, reflecting whether a comparable property is superior or inferior.

Property characteristics also influence the appraisal. Home size, including square footage, bedrooms, bathrooms, and lot size, are fundamental considerations. Property age, condition, and construction material quality are also assessed. Any updates or renovations, such as a modernized kitchen or new roofing, can contribute positively to value.

Location is a primary determinant of value. Appraisers consider neighborhood desirability, proximity to amenities like schools and shopping, and access to transportation. External factors, such as noise pollution from a busy road or the presence of vacant lots, can negatively influence value, while desirable views or a well-maintained neighborhood can have a positive impact. Unique features or deferred maintenance, like functional obsolescence or significant repair needs, are also factored into the valuation.

Navigating Different Appraisal Results

Appraisal outcomes dictate subsequent steps for buyers and sellers. When an appraisal matches the contract price, the transaction proceeds as planned without valuation complications. This confirms the purchase price aligns with market value, satisfying lender requirements.

If the appraisal comes in above the contract price, the buyer gains immediate equity in the property. This scenario is favorable for the buyer and does not disrupt the transaction, as the lender’s loan amount is based on the lower contract price.

The most complex situation arises when an appraisal comes in below the contract price, creating an “appraisal gap.” This gap is the difference between the agreed-upon sale price and the lower appraised value. Lenders will only finance up to the appraised value, meaning the buyer cannot borrow the full contract price if it exceeds the appraisal.

Several options exist to bridge an appraisal gap. The buyer can pay the difference in cash, bringing additional funds to closing to cover the gap. This is a viable solution if the buyer has available liquid funds, but it requires more out-of-pocket payment. Alternatively, the buyer can shift funds from their down payment to cover a portion of the gap. This could impact the loan-to-value ratio and potentially necessitate private mortgage insurance.

Another common approach involves negotiation between the buyer and seller. The seller may agree to reduce the purchase price to match the appraised value, or the parties might negotiate a split of the difference. Sellers might be willing to renegotiate to avoid restarting the sales process, particularly if another buyer is likely to face a similar appraisal issue.

Contingency clauses within the purchase contract provide protection in these scenarios. An appraisal contingency allows the buyer to back out of the deal without penalty and recover earnest money if the appraisal comes in below the contract price. This clause safeguards the buyer from overpaying for a property. If an appraisal contingency is not included or waived, the buyer may risk losing earnest money if they cannot close due to a low appraisal.

Challenging the appraisal is another option, though it requires compelling evidence. Buyers or their agents can request a “reconsideration of value” from the lender, providing documentation of any errors, omissions, or additional comparable sales that were not initially considered. This request goes to the lender, who communicates with the appraiser. While challenging an appraisal can be difficult, appraisers can revise their valuation if new, relevant information is presented. If an agreement cannot be reached through negotiation or challenge, the transaction may ultimately be terminated, allowing both parties to move on.