What Sellers Can Do If a Home Appraisal Comes in Low

There are plenty of essential parts of the home sale process, from receiving offers to negotiating to closing. But one of the most important is undoubtedly the home appraisal. It’s crucial that this goes well — but what if the home appraisal comes in low?

Any potential home buyer seeking a mortgage needs an appraisal to close the deal. Before financing a mortgage, a bank wants to make sure that the size of the loan isn’t more than the house’s fair market value. So the lender hires an appraiser, typically from an appraisal management company, to provide an objective assessment of your home’s value.

If that appraisal is less than your offer, that evaluation feels anything but fair. But it’s important to prepare yourself for this outcome. The National Association of Realtors (NAR) reports in its Realtors Confidence Index survey that 6% of contracts with delayed settlements encountered appraisal issues in 2022. The good news is that number is down 12% from 2021!

Still, fear of appraisals coming in low is still rampant, so much so that 16% of buyers waived the appraisal contingency in 2022, according to the NAR. The appraisal contingency allows buyers to pull out of the deal if the appraisal comes in low. During the hot sellers’ market of 2020-2022, many buyers forwent the appraisal contingency to make their offer stronger, using cash to close the appraisal gap. With the market rebalancing in 2023, top agents surveyed by HomeLight report that buyers, feeling more leverage, are less willing to waive the appraisal contingency.

But selling a house without contingencies isn’t the only way to go. If an appraisal does come in low, a seasoned and professional agent will know how to handle it and can help you get a second shot. HomeLight can connect buyers and sellers with a top agent in their area.

What Does a Home Appraiser Look At?

An appraiser records the layout of your property and assesses its condition. Appraisers must be qualified and certified in your state and, in most states, adhere to the Appraisal Foundation’s Uniform Standards of Professional Appraisal Practice. Depending on your property’s condition and size, an appraisal can be a quick 15-minute visit or a two- to three-hour examination.

Appraisers look for a variety of details, according to the Uniform Residential Appraisal Report form:

• Your property’s dimensions
• The year your home was built
• Neighborhood characteristics, including zoning classification
• Construction details, such as:
  • Type of foundation
  • Presence of a basement or attic
  • Type of driveway
  • Car storage
  • Materials of the interior walls and floors
• Utilities and amenities, such as:
  • Whether you have public utilities or other off-site improvements (and whether these are typical for the market area)
  • Presence of a fireplace or patio
  • Features such as energy-efficient appliances
  • Types of plumbing and lighting fixtures
• General condition and any needed repairs

Afterward, the appraiser searches for similar sales in the area within the prior 12 months, often called comps, and uses their sales prices to determine your home’s fair market value.

The appraiser drafts a report for the lender, which can take a week or two to complete. FHA and VA loan appraisals might take a bit longer because these lenders require more detailed appraisal reports.

Why appraisals come in low

All these variables leave plenty of room for an appraisal to come in low. Let’s outline the most common reasons.

Home price doesn’t reflect the market

Sometimes, when a market moves very quickly, the comps from the last 12 months can’t keep up with current sales prices.

“Usually, the market moves before the appraisers do,” says New York City real estate agent Dylan Hoffman, who ranks in the top 100 brokers nationwide. “It’s the brokers that set the market, not the banks. We’re always pushing the market up, up, higher, higher. We have to become educators to the banks to let them know what the market’s doing.”

This commonly happened throughout the hot pandemic market, when low inventory and high demand drove sales prices up rapidly. However, this same problem can happen in a sluggish market, where a lack of quality comps makes it tricky to nail down the property’s market value.

Inadequate comparable properties

Your appraisal might also suffer from bad or missed comps. Perhaps a neighboring property was rundown when it was sold, but the new owners have since rehabilitated it — or public records haven’t yet recorded a recent sale of a property similar to yours. Foreclosures, bank-owned properties, private sales to relatives, and distressed properties in your area also can skew the comps.

In terms of pricing, if homes in your area tend to sell for about $500,000 — where you’ve set your asking price — and one of the comps that an appraiser has selected sold for $380,000, the whole average drops to $450,000.

Think of an appraisal as the appraiser’s “price opinion,” Hoffman says. “It’s up to the appraiser’s discretion to follow up and figure out why there’s an outlier.” That might mean researching a previous sale through public records or the broker who sold the property.

Inexperienced or overworked appraisers

Some appraisers might be new to the profession or their area and lack local market knowledge. There has also been a shortage of appraisers in recent years, leading to higher workloads for appraisers. In the NAR’s 2022 Appraisal Survey, 26% of appraisers named high demand for appraisals among their top four challenges.

High demand for appraisals can lead to appraisers rushing appointments, or even doing a drive-by or virtual appraisal.

Still, Jackie Sawyer, a Maine-based real estate agent, said that she rarely sees variance in appraisals due to the appraiser themselves.

“I think there’s a good amount of consistency between the appraisers that we see,” she explained. “I don’t think that there’s any that have a reputation as either being really good or really hard.”

Neglected upkeep

Homeowners tired of having their homes on the market also might have put aside minor household repairs and slacked off on cleaning up. Those little things too can cast your home in a bad light.

While appraisers strive to provide an objective assessment of value, they are still human. Hoffman says that “If they [appraisers] are not wowed by the property and sold on the property while they’re there, that can be an issue.”

Avoiding a low appraisal

To start your appraisal off right, collect any important documents for the appraiser, such as a land survey that verifies your property’s size and receipts for any recent improvements.

Have your real estate agent there to talk about any unusual circumstances for low or high sales in your area, and to provide their own comps. Hoffman says he prepares an entire appraisal package, including recent comps and the property’s floor plan.

Then clean up inside and out. Touch up any chipped paint, replace that wonky hinge on the kitchen cabinet, corral any pets, and clear away the clutter. Trim your hedges, mow the lawn, and clean the gutters. You want the appraiser to see your home is well-maintained.

“Treat it just like you would if it was a buyer,” Hoffman says. “It is a showing. You have to sell the appraiser.”

You also can pay for an appraisal before listing your home for sale, then set your asking price to match. While this should hopefully eliminate the troubles that appraisal gaps cause, it’s worth noting you’ll still have to get another appraisal after you accept an offer on the home. Sawyer recommends getting a free pricing opinion from a broker instead of spending the money on two appraisals.

“I think appraisers may come in at a different price point if the house is under contract at a certain price point. They may take that into consideration when applying a home value,” Sawyer says. “So, you may not get the same evaluation if you’re doing an appraisal before you list the house.”

What sellers can do if the appraisal comes in low

If your appraisal does come in low, don’t panic. There are still ways to turn this situation around.

1. First, look for errors in the home appraisal.

As the seller, you won’t automatically get a copy of the report when it’s ready, but you can request one, and the lender will have to provide it to you in 30 days’ time.

As you examine the report, double-check the basic data (square footage, number of bedrooms and bathrooms) and how the appraiser described your home’s features. Look for any errors, such as missing that you have energy-efficient appliances and lighting.

2. Challenge an incorrect appraisal with a Reconsideration of Value.

If you and your real estate agent have done your homework and feel confident that the home appraisal was erroneous, you can challenge the appraisal with a reconsideration of value. To file a reconsideration of value, you must argue that the appraiser made an error such as those listed above. Alternatively, your agent might be able to argue that the appraiser used a poor analysis of comps.

Alternatively, you can file a formal complaint with your state appraisal board if you believe your appraiser wasn’t qualified or was potentially discriminating against you.

3. Request a new home appraisal.

If you were able to show that the first appraisal was problematic or inaccurate, the buyer can request a new appraisal with a different appraiser from their lender. Ultimately this is up to the buyer since they will be footing the bill.

“It’s very hard,” Hoffman says. In some cases, “The deal can die.”

4. Negotiate with the buyer to save the deal.

As the homeowner, it’s your decision whether to hold firm on the asking price or drop to the appraised value. But there are ways to find common ground, and your agent can help you.

“A low appraisal is always an opportunity for renegotiation,” Sawyer said.

For instance, a buyer can make a larger down payment to cover the difference between the appraised value and the asking price or pay private mortgage insurance.

You also can make up some of the difference by covering the buyer’s closing costs.

What the 2023 market means for sellers facing a low appraisal

Low appraisals have been a cause of stress for the last few years due to the ever-changing market. However, now that comps are starting to catch up with current home prices, low appraisals are less common, says Sawyer.

“I think when the market was expanding and growing rapidly this spring, that was when we saw a lot of the appraisals coming in low because there weren’t comps to support the increase in prices,” she explained. “But now that those properties have closed, they are the new comps. And so we’re starting to see more validation for the pricing where it’s at now.”

Still, sellers should remain vigilant about avoiding low appraisals as the market starts to cool off.

Buyers are gaining some leverage in the market again; in the fourth quarter of 2022, only 30% of agents surveyed in HomeLight’s Top Agent Insights New Year 2023 report characterized their area as a seller’s market. In many ways, the markets are balancing again, as days on market increase and bidding wars decline.

Sellers should not be overconfident, especially when it comes to deferred maintenance. While houses in all conditions were flying off the market years ago, 65% of agents in HomeLight’s Fall 2022 Insights named deferred maintenance a huge seller blindspot. Pricing too high can also be a problem.

“With the market slowing as it is now, going really aggressive with a price point might be a little risky. So I try to advise my sellers to be a little bit more moderate in the pricing,” Sawyer commented. “… If they’re going really aggressively price-wise, that may mean they’re on the market for a little bit longer. It may mean that they could get a low appraisal which would bring down the closing price in the end anyway.”

Header Image Source: (Pxhere)