How Often Do Houses Appraise Low and What to Do Next

A home appraisal serves as a professional, unbiased assessment to determine a property’s market value. This evaluation is typically required during a real estate transaction, especially when a mortgage is involved, to ensure the sale price aligns with the home’s actual worth. A “low appraisal” occurs when this determined value falls below the purchase price that a buyer and seller have agreed upon.

Prevalence and Context of Low Appraisals

Low appraisals, while not an everyday occurrence, are a possibility in real estate transactions. Approximately 8% of home appraisals come in below the contract price, though this percentage can fluctuate based on market conditions. While most appraisals confirm the contract price, a low appraisal still happens often enough to warrant understanding its implications.

The appraisal process plays a crucial role in protecting both lenders and buyers. Lenders require an appraisal to ensure the loan amount aligns with the property’s value, as the home serves as collateral for the mortgage. This mitigates the lender’s risk by confirming the property is sufficient collateral for the loan. For buyers, an appraisal provides an objective benchmark, helping them avoid overpaying for a home by independently assessing its fair market value.

An appraiser acts as an independent third party, providing an objective opinion of a property’s value. Appraisers collect and analyze property data to form an opinion of its value. They are trained professionals who must be licensed in their state, especially when appraising property for financial institutions. This professional assessment ensures the valuation is based on objective criteria rather than subjective opinions of buyers or sellers. A low appraisal reflects a valuation discrepancy, not a judgment on the property’s quality, but it can significantly impact the transaction.

Common Reasons for Low Appraisals

Several factors can lead to a home appraising for less than its agreed-upon sale price, creating an appraisal gap. These factors often relate to economic trends, property characteristics, or the appraisal process itself.

Market Conditions

Market conditions frequently contribute to low appraisals, especially in rapidly changing environments. In a fast-paced market where home prices are rising quickly, appraisal values may lag behind current seller expectations or recent peak sales. This occurs because appraisers primarily rely on data from recent comparable sales, typically from the past three to six months. If prices have surged significantly in the interim, the historical sales data may not fully support a higher, more current contract price. A cooling market, rising interest rates, or increased inventory can also lead to appraisals coming in lower, as these conditions indicate a shift in demand and property values.

Lack of Comparable Sales

The availability and relevance of comparable sales, often called “comps,” are central to an appraiser’s valuation. Appraisers analyze recently sold properties similar in size, age, condition, and location to the subject property. A lack of suitable comparable sales can make it challenging for an appraiser to justify a higher value. This can occur with unique properties, homes in areas with limited sales activity, or when recent sales do not align with the subject property’s characteristics. If the appraiser uses comps that are not truly comparable, or overlooks more appropriate recent sales, it can result in an inaccurate, lower valuation.

Property Condition and Features

A property’s condition and features also play a substantial role in its appraised value. Appraisers assess the age, wear and tear, maintenance, and overall upkeep of a home. Deferred maintenance, outdated features, or a need for significant repairs can lead to a lower valuation compared to similar homes in better condition or with more modern amenities. Unique characteristics, such as an unusual layout or a less desirable location within a neighborhood (e.g., proximity to noise sources), can also negatively influence an appraisal. Quality construction and desirable features positively influence the appraisal.

Appraiser Error or Oversight

While appraisers follow strict guidelines, the process does involve a degree of professional judgment, and errors can occur. Appraiser oversight or error, though rare, can happen, such as missing factual details, incorrect measurements, or overlooking recent improvements. Occasionally, an appraiser might be unfamiliar with a specific local market, leading them to use less relevant data. Appraisers are expected to provide objective opinions, adhering to standards like the Uniform Standards of Professional Appraisal Practice (USPAP).

Overpricing

Sometimes the contract price simply exceeds the current market value as determined by an independent appraisal. Overpricing can stem from emotional attachment, aggressive bidding wars, or unrealistic seller expectations. In such cases, the appraiser provides an objective valuation based on market data, which may reveal the contract price is higher than market support.

Steps After a Low Appraisal

Receiving a low appraisal can be a setback, but it does not automatically mean the end of a real estate transaction. Both buyers and sellers have several steps to consider to address the situation and potentially salvage the deal.

Review the Appraisal Report

The first step after receiving a low appraisal is to thoroughly review the appraisal report. Check for factual errors, such as incorrect square footage, number of rooms, or property features. Buyers or their agents should also scrutinize the comparable sales used, looking for overlooked recent sales that might better support the contract price or inconsistencies in adjustments. Documenting these discrepancies is crucial for any subsequent actions.

Request a Reconsideration of Value (ROV)

If errors or omissions are identified, or if more suitable comparable sales exist, a “Reconsideration of Value” (ROV) can be requested. This is a formal process where the lender, on behalf of the buyer, asks the appraiser to review and adjust findings based on new information. While buyers cannot directly challenge the appraiser, they can provide supporting documentation to their lender, who then communicates with the appraiser. Success with an ROV is not guaranteed, but it is a viable option if clear, justifiable reasons for a revision are presented.

Renegotiate the Purchase Price

A common approach to resolve an appraisal gap is for the buyer and seller to renegotiate the purchase price. The seller might agree to lower the price to match the appraised value, especially if motivated to sell quickly or if market conditions are cooling. Alternatively, the parties might agree to split the difference, with the seller reducing the price and the buyer covering the remaining gap. This negotiation can keep the deal moving forward by adjusting terms to align with the appraised value.

Bring Additional Cash to Closing

Another option for the buyer is to bring additional cash to closing to cover the appraisal gap. If the buyer has sufficient liquid funds and is committed to the property, they can pay the difference between the appraised value and the contract price out of pocket. This allows the transaction to proceed without changing the sale price or requiring a new appraisal. However, this option may not be feasible for all buyers, as it requires funds beyond the down payment and closing costs.

Terminate the Contract

If an agreement cannot be reached through renegotiation or if the buyer is unable to cover the appraisal gap, the contract may be terminated. Most real estate purchase agreements include an appraisal contingency, allowing the buyer to walk away without penalty if the home does not appraise for the agreed-upon price. This contingency safeguards buyers, protecting their earnest money deposit if the transaction falls through due to a low appraisal.