Do Appraisals Usually Come in Low?

A real estate appraisal is a professional assessment that determines a property’s market value. This valuation is central to real estate transactions, particularly when securing financing. Mortgage lenders require an appraisal to ensure the property serves as adequate collateral for the loan amount. A common concern for buyers and sellers is whether appraisals will “come in low” compared to the agreed-upon sale price, which can complicate the transaction.

Understanding Real Estate Appraisals

A real estate appraisal provides an independent, unbiased estimate of a property’s fair market value. It is primarily for lending purposes, ensuring financial institutions do not lend more than the property is worth. Licensed appraisers, who are neutral third parties, conduct these evaluations.

The appraisal process begins after a buyer’s offer is accepted. The buyer’s mortgage lender usually orders the appraisal, though the buyer is responsible for the cost, typically $325 to $1,000. During the appraisal, the appraiser conducts an on-site visit to inspect the property’s interior and exterior, noting its condition, size, layout, and features.

Appraisers use the sales comparison approach, analyzing recently sold properties (“comparables” or “comps”) similar in characteristics and proximity to the subject property. They gather data from multiple listing services (MLS), public records, and other sources. Adjustments are then made to the subject property’s value based on differences in features, condition, age, and location compared to the comps.

Factors Contributing to Lower Appraisals

An appraisal may come in lower than the agreed-upon sale price for various reasons, creating an “appraisal gap” between the contract price and the appraised value. Comparable sales data is a primary factor. Appraisers prioritize recent, similar sales within the immediate area. Insufficient or outdated comparable transactions can challenge a higher valuation. Appraisers may also select different comparables than those used by real estate agents, potentially overlooking unique aspects or focusing on sales that do not fully reflect the property’s market position.

Market conditions also influence appraisal outcomes. In a rapidly appreciating market, prices can rise faster than sales data reflects, leading to appraisals that lag purchase offers. Conversely, a cooling market with declining values or excess supply can result in lower appraisals. Overpricing, especially without a comparative market analysis, can also lead to an appraisal falling short of the listing price.

Property condition and features are additional determinants. Deferred maintenance or substantial repairs can negatively impact the appraised value. Unique or unconventional features, such as over-improvements exceeding neighborhood standards, may not yield a full return on investment. For example, a high-end renovation might not appraise for its full cost if it far surpasses the quality of other homes in the area.

An appraiser’s perspective and expertise can also influence the outcome. While appraisers are committed to objectivity, their judgment and data can lead to a different conclusion than a buyer or seller. An appraiser lacking sufficient local market knowledge or under time constraints might not identify suitable comparable properties or fully account for a home’s specific attributes. Factual errors or misrepresentations in the appraisal report can also occur, impacting the valuation.

Consequences of a Low Appraisal

When an appraisal comes in lower than the agreed-upon sale price, it creates an “appraisal gap” with direct implications for financing. Lenders typically approve a loan amount only up to the appraised value, not the higher sale price. This means the buyer cannot obtain a mortgage large enough to cover the entire purchase price.

For the buyer, a low appraisal often necessitates bringing more cash to closing to cover this appraisal gap. If the buyer lacks additional funds, they may need to renegotiate the price with the seller or, as a last resort, walk away from the deal if an appraisal contingency is in place. Without such a contingency, walking away could result in the loss of their earnest money deposit.

The seller also faces consequences when an appraisal comes in low. They may need to lower the sale price to match the appraised value or compromise by splitting the difference with the buyer. Refusing to adjust the price risks the deal falling through, requiring relisting the property and potentially incurring additional time and marketing costs. In some instances, a seller might offer concessions, such as contributing to the buyer’s closing costs, to help bridge the financial gap.

A low appraisal can lead to transaction delays, as both parties must renegotiate to find a mutually acceptable solution. If no agreement is reached, the purchase agreement may be canceled, forcing both buyer and seller to start anew.

Strategies for Addressing a Low Appraisal

When faced with a low appraisal, several actionable strategies exist for both buyers and sellers to try and keep the transaction moving forward. One common approach is to request a Reconsideration of Value (ROV) from the lender. This allows parties to submit additional comparable sales data not initially considered by the appraiser or to point out factual errors in the appraisal report. While success is not guaranteed, providing strong supporting evidence, such as recent sales of highly similar properties, can prompt the appraiser to review and potentially revise their valuation. The ROV process typically takes one to four business days, and only one request is usually permitted per appraisal.

Price renegotiation is another strategy between the buyer and seller. The buyer can request a reduction in the sale price to align with the appraised value. Alternatively, the parties might agree to split the difference, with the seller lowering the price partway and the buyer covering the remaining gap. This collaborative approach can save the deal by finding a compromise that accommodates the lender’s valuation.

If renegotiation isn’t feasible, the buyer may cover the appraisal gap by bringing additional cash to closing. This requires sufficient liquid funds beyond their initial down payment and closing costs. In some cases, the seller might offer concessions, such as contributing to the buyer’s closing costs, to help bridge the financial difference. This can incentivize the buyer to proceed with the purchase despite the appraisal shortfall.

Seeking a second appraisal is another option in specific circumstances. This typically requires lender approval, and the buyer generally pays for it, unless the lender mandates it due to specific conditions, such as a property being “flipped” within a short period at a significantly increased price. There is no guarantee a second appraisal will yield a higher value, and the lender is not obligated to accept it. As a final resort, if an appraisal contingency is part of the purchase agreement and no resolution can be reached, the buyer may terminate the contract without penalty.