How Often Do Homes Appraise for Less?

Home appraisals are a standard step in real estate transactions, whether buying, selling, or refinancing a property. An appraisal provides an independent estimate of a property’s market value, protecting lenders from over-lending and ensuring buyers pay a fair price. A common concern is the possibility of an appraisal coming in lower than the agreed-upon sale price or the homeowner’s expectations.

Frequency of Lower Appraisals

Homes appraising for less than the purchase price or estimated value is a notable aspect of the real estate market. While not a majority, it is common enough to warrant attention. Industry reports indicate that a single-digit percentage of appraisals, typically 7% to 10%, result in a value lower than the contract price. This frequency fluctuates based on economic conditions and regional market dynamics.

In a rapidly appreciating “seller’s market,” low appraisals might be less frequent as property values keep pace with contract prices. Conversely, during market cooling or decline, or in a “buyer’s market,” the incidence of low appraisals can increase. Sales prices may outpace the more conservative valuation methods used by appraisers. Appraisers rely on recent comparable sales, and if the market shifts quickly, older sales data might not fully reflect current conditions, potentially leading to a lower valuation.

Reasons for Low Appraisals

Several factors contribute to a home appraising for less than the anticipated value. A primary consideration is the availability and relevance of comparable sales, often called “comps.” If there are insufficient recent sales of similar properties nearby, or if available comps are not truly representative, the appraiser may struggle to support a higher valuation. For example, if a home has unique architectural features or extensive upgrades not found in nearby sales, finding suitable comparisons can be challenging.

Market conditions play a significant role; a rapidly decelerating market can cause recent sales data to become quickly outdated, failing to capture current price trends. Property condition is another major determinant. Appraisers account for deferred maintenance, outdated fixtures, or necessary repairs not fully considered during price negotiation. Structural issues, an aging roof, or severely outdated interiors can reduce a property’s appraised value, as these factors impact its market appeal and require future investment.

If the agreed-upon sale price was too high for the current market, the appraisal will likely reflect this overpricing. While appraisers use professional judgment, errors like overlooking a significant property feature or miscalculating square footage can lead to a low appraisal.

Impact of a Lower Appraisal

A low appraisal has financial and procedural consequences for all parties. For buyers, the most immediate impact is often the need to cover the difference between the appraised value and the agreed-upon sale price in cash. Mortgage lenders typically only finance up to the appraised value, not the contract price. For example, if a home is under contract for $400,000 but appraises for $380,000, the lender will base the loan on $380,000. This requires the buyer to bring an additional $20,000 to closing to bridge the gap, affecting the loan-to-value (LTV) ratio and potentially loan eligibility.

For sellers, a low appraisal often creates pressure to reduce the sale price to match the appraised value, or meet the buyer partway. Failure to do so can lead to the deal falling apart, forcing the seller to relist the property and incur additional carrying costs. Sellers might also offer other concessions, such as covering a portion of the buyer’s closing costs, to salvage the transaction. For homeowners seeking to refinance, a low appraisal can limit options, resulting in a smaller loan amount, a higher interest rate due to an unfavorable LTV, or even denial of the refinance application.

A low appraisal frequently causes transaction delays. Renegotiating terms, challenging the appraisal, or seeking alternative financing can push back the closing date by several weeks. This creates logistical problems for buyers and sellers, especially if they have made arrangements for moving or other property purchases.

Addressing a Low Appraisal

When faced with a low appraisal, proactive steps can mitigate its impact. First, carefully review the appraisal report for inaccuracies, factual errors, or overlooked comparable properties. This includes verifying property characteristics like square footage, number of bedrooms and bathrooms, and any recent improvements. Comparing the appraiser’s chosen comparable sales to other recent transactions can reveal if more suitable comps were available.

If legitimate discrepancies are identified, initiate a reconsideration of value. This involves formally challenging the appraisal by submitting a written request to the lender with supporting documentation. This documentation might include additional comparable sales, detailed renovation information, or corrections to factual errors. While a successful challenge is not guaranteed, it is a viable option if strong evidence exists. The lender will review the request and may ask the appraiser to re-evaluate their findings.

If challenging the appraisal is unsuccessful, negotiation between the buyer and seller becomes paramount. Buyers might propose reducing the sale price to the appraised value, or splitting the difference. Sellers might agree to a price reduction, or offer other concessions like covering some closing costs. For buyers determined to purchase the home, making up the difference with additional cash at closing remains an option. Exploring a second appraisal might be considered, though this is typically only an option if the lender allows it. If no agreeable solution can be reached, walking away from the deal may be the most prudent decision.