Do Most Homes Appraise for the Selling Price?

While many homes do appraise for their selling price, it is not a guaranteed outcome in every real estate transaction. An appraisal provides an independent professional opinion of a home’s value, primarily serving to protect the mortgage lender’s investment. If the appraised value is lower than the agreed-upon selling price, it can impact the financing of the purchase and the overall progression of the real estate deal.

Understanding Home Appraisals

Licensed or certified professionals, known as appraisers, conduct these evaluations. These appraisers operate independently from buyers, sellers, and real estate agents to ensure impartiality in their assessment. Appraisers use various methods to determine value, with a significant focus on comparable sales, which involves analyzing recently sold properties in the vicinity.

Factors Influencing Appraisal Value

Several elements influence an appraiser’s determination of a home’s value, which can explain why an appraisal might differ from the selling price. Comparable sales, often referred to as “comps,” are the most significant factor. Appraisers examine recent sales of properties with similar features and proximity to the subject home, aiming for at least three comparable sales within the last 90 days if available.

The physical condition of the property, including its maintenance, repairs, and overall wear, also plays a substantial role. Newer homes often appraise higher due to reduced maintenance needs and modern amenities.

Location is another important consideration, with neighborhood characteristics, school districts, access to amenities, and overall market demand in a specific area affecting value. Property characteristics such as square footage, the number of bedrooms and bathrooms, and lot size are evaluated, alongside specific amenities like a garage or a modern kitchen.

Broader market conditions, including whether it is a buyer’s or seller’s market and current interest rates, can influence the appraisal. While upgrades and renovations can add value, they do not always provide a dollar-for-dollar return on investment.

Navigating a Low Appraisal

When a home appraises for less than the agreed-upon selling price, it creates an “appraisal gap” and can have immediate implications for financing. Lenders base the loan amount on the appraised value or the sales price, whichever is lower. This means the buyer might not receive the full loan amount needed to cover the agreed-upon purchase price.

For buyers, options include covering the appraisal gap by bringing additional cash to closing. Alternatively, the buyer and seller can renegotiate the sales price to match the appraised value. Many purchase agreements include an appraisal contingency, which allows buyers to withdraw from the deal without losing their earnest money if the appraisal comes in too low and an agreement cannot be reached.

Sellers also have several choices when faced with a low appraisal. They might agree to lower the price to align with the appraised value to ensure the sale proceeds. Another option is to dispute the appraisal, though this can be challenging. If no mutual agreement is reached, terminating the sale remains a possibility for both parties.

Steps to Address a Low Appraisal

Upon receiving a low appraisal, both parties should carefully review the appraisal report. This review is important for identifying any factual errors, incorrect data, or overlooked comparable properties that could have affected the valuation.

A formal challenge, known as a Reconsideration of Value (ROV), can be requested through the lender. This process involves providing the appraiser with additional, relevant comparable sales data or information about property improvements that may have been missed. However, an ROV does not guarantee a change in the appraised value.

Renegotiating the purchase price between the buyer and seller is a common step. This can involve the seller lowering the price, or the buyer agreeing to cover the appraisal gap with additional funds. If all else fails and an appraisal contingency is in place, the buyer may choose to walk away from the deal. In some instances, a second appraisal might be considered, though it is less common and often requires the buyer to pay for it, with no guarantee the lender will accept it.