How Often Do Appraisals Come In Low 2022?

A home appraisal is a professional, unbiased assessment of a property’s market value. This evaluation is a standard step in real estate transactions, including buying, selling, or refinancing a home. Its primary purpose is to provide lenders with an objective valuation to ensure the property’s value supports the loan amount. An appraisal helps protect all parties by confirming the property’s worth in the current market.

Frequency of Low Appraisals in 2022

In 2022, approximately 8% of home appraisals were valued lower than the contract price, according to CoreLogic data. This aligns with Fannie Mae’s observations, which also report appraisals coming in below contract about 8% of the time, and confirming the contract price in roughly 95% of cases.

The National Association of Realtors (NAR) reported similar findings, with about 10% of appraisals coming in lower than the contract price. This decreased from 18% in 2021. Moderation in home price growth and reduced buyer competition contributed to this trend in 2022.

Reasons Appraisals Come in Low

Several factors can cause a home appraisal to come in low. Rapidly shifting market conditions are a significant reason; quickly appreciating home values can outpace recent sales data. Appraisers rely on comparable sales, or “comps,” from the last three to six months to determine value.

A lack of recent, comparable sales in the immediate vicinity can also lead to a lower valuation. Additionally, the property’s condition plays a role; significant deferred maintenance or highly personalized renovations might not add equivalent value. Overpricing by the seller or real estate agent is another common cause for a low appraisal.

Impact of a Low Appraisal

A low appraisal can significantly impact all parties involved in a real estate transaction. For buyers, the primary concern is the financing gap, as lenders typically only approve loans up to the appraised value of the property. If the appraisal comes in low, the buyer may need to bring additional cash to cover the difference between the appraised value and the contract price, or renegotiate the terms of the sale. Without sufficient funds, the buyer might be forced to withdraw from the purchase.

Sellers face the risk of the deal falling through if the appraisal is low. They may need to lower the sale price, offer concessions, or put the property back on the market, incurring costs and delays. Lenders rely on appraisals to protect their investment, limiting the amount they are willing to finance. Many purchase agreements include an appraisal contingency, allowing buyers to back out without penalty if the appraisal falls below a certain threshold.

Strategies for Addressing a Low Appraisal

When faced with a low appraisal, several strategies can be employed to keep the transaction on track. Initially, it is important to carefully review the appraisal report for any factual errors, omissions, or incorrect comparable sales data. An appraiser might miss significant upgrades or use comps that are not truly representative of the property.

If errors are identified, a reconsideration of value (ROV) can be requested through the lender. This process involves submitting additional data, such as more appropriate comparable sales or details of property improvements that were overlooked. While not guaranteed to change the appraisal, a well-supported ROV can sometimes lead to an adjustment.

Negotiating the sale price is a common resolution. This could involve the seller reducing the price, the buyer covering the appraisal gap with additional cash, or both parties splitting the difference. Seller contributions, like credits towards closing costs, can also help bridge the financial gap. If an appraisal contingency is in place and no solution is reached, the buyer can terminate the contract. A second appraisal might be considered, though less common due to cost and lender requirements.