It's not uncommon when a home's appraisal comes back low - especially in hot seller's markets where home prices head skyward and home inventory sinks like a rock. But, just because the appraisal comes back low, doesn't mean your home purchase is doomed. Read on to learn what to do if an appraisal comes back low.
photo by Curtis Adams
What is a home appraisal, and how much does it cost?
Simply put, a home appraisal is an analysis of a home to assess its market value. The appraisal looks at the features and condition of the home as well as the sale price of recently sold properties that are comparable to the one being appraised.
Appraisers are required to be certified professionals in South Carolina and will typically follow the Appraisal Foundation's Uniform Standards of Professional Appraisal Practice.
The home appraiser is chosen by the mortgage lender and is paid for by the buyer typically unless otherwise negotiated in the purchase agreement. As a homeowner, you can actually purchase a home appraisal at any time, and this service typically costs between $300 to $600.
Depending on several factors, including the home's size and condition, the process can range anywhere from 30 minutes to 2 hours.
Is it common for an appraisal to come in low?
As home prices have increased steadily in the past several years, it's becoming increasingly common to see appraisals "Come in Low" compared to the asking price. With the rate of increase rising sharply in the last year alone, appraisals haven't kept up with the market.
According to information on QuickenLoans.com, data from Case-Shiller indicate that appraisals came in below the contract price at a rate of 19% in 2021.
But aside from the market fluctuations, a lot of factors can still affect the appraisal such as location, school district, and home features.
Can a seller back out if the appraisal is too low?
For the most part, both parties usually want the transaction to work so if an appraisal comes back low, negotiations usually occur. However, the seller may refuse to negotiate the price of the home or make any concessions or waivers. In this case, the seller may choose to back out and take the home off the market in order to re-list it.
Can a buyer back out after a low appraisal?
Yes, buyers can back out of the sale of the home but there are different scenarios in which this can happen. If the buyer has an appraisal contingency as part of their offer on the home. They're able to walk away from the deal if the appraisal comes in low and they're not willing to negotiate or pay the difference to get the home. Unlike the buyer with an appraisal contingency, however, buyers without this can still walk away but will risk losing their earnest money in the process. This can be an expensive decision to make.
What hurts an appraisal?
There are a number of factors that can affect the home appraisal. Not the least of which is when you find yourself in a seller's market where bidding wars and low inventory drive up the sale prices.
On the flip side, sellers may price their homes too high if they're not aware of foreclosure surges and other situations in a buyer's market where the inventory has increased and home values have decreased.
Similarly, transitions between these two types of markets can cause discrepancies in appraisals as the market catches up.
Home appraisers have to start somewhere, so there are inexperienced appraisers in the industry that can affect your appraisal outcome because they are not quite familiar with the nuances of your local market. This is why it's important to make sure the appraiser that's being used is experienced and knowledgeable.
Even the most experienced appraisers can miss something. Sometimes they'll miss upgrades and popular features to a home or won't use comparables that aren't really comparable. That's why it can be a big help when you're trying to get the highest appraisal (link to article) to provide them with a binder listing all the important information you want them to consider.
Appraisers around the country have a high workload in the most favorable conditions. During a hot market, they're even more strained so making life easier for them can be a big help.
How accurate is Zillow Zestimate for appraisals?
It may be tempting to look a home up on an online home site like Zillow or Redfin and take the price valuation it offers as the Gospel. The problem with Zillow appraisals is that they're almost never accurate. These websites use a series of calculations and algorithms to come up with a number that doesn't take into account much of anything in the way of local data, comps, and the like.
For that reason, it's best to stick to your real estate agent's advice and the professional appraiser. Zillow even says their "Zestimates" are subject to the available data and that they shouldn't be used as appraisals.
Low Appraisal Tips For The Seller
As the seller, there are definitely things you can do in order to put your home's best foot forward and get a fair and accurate appraisal. Whether that involves renovating your home before selling or simply giving everything a good cleaning. If you've gotten an appraisal back already and it's low, there are also things you can do to deal with that situation as well. Let's take a look at how to prepare for an appraisal first.
Prepare your home
Just as you would prepare to list or show your home to potential buyers, it's important to make sure your home is in its best condition before the appraiser arrives. Ensure your home's clean inside and out and complete any upgrades or maintenance planned.
Be available to answer any questions that may come up
Make sure to be available in some way to answer any questions the home appraiser may have before, during and after their visit. To this end, the next tip will help tremendously in this area.
photo by Felicity Tai
Prepare a binder of important information
Work with your real estate agent to prepare an informational binder for the appraiser that contains a list of all the upgrades and when they were done. Your own accurate comps for homes similar to yours that have recently sold in the area and any other information that could help them.
Price your home appropriately
One of the best ways to ensure you don't find yourself in a low appraisal situation is to listen to your agent when deciding on the listing price. Your agent should have a solid grasp on the current real estate market broadly and locally and be able to provide you some tips to help with a higher appraisal. So, appropriately pricing your home not only helps to have an accurate appraisal, but it also helps to drive interest in your home with buyers.
Request that your buyer make up the difference in cash
If you're already in a low-appraisal situation, you can first ask the buyer to make up the difference in price with cash.
Lower your price to match the appraised value
If your buyer refuses to make up the difference, you can first try to negotiate a split with the buyer in which you lower the price by half the difference if they make up the remaining difference. If all else fails and you want to complete the sale, you can lower your asking price to match the appraised value.
Know how much is your home worth
To be sure that you've got the most accurate information about your home's value, try our free home value tool to get an MLS accurate estimate of your home's value, then get in touch with us to get guidance on the potential sales price you could get in the current market.
Low Appraisal Tips For The Buyer
Do your homework before making the initial bid on the home
Work closely with your real estate agent to decide on the best offer to make on the home. This should be a balance of what you're comfortable with and your agent's advice based on market conditions and local demand. If you do this, you can be confident you made the best offer you could. If the appraisal comes in lower than expected, the decisions you make from that point on will be ones you can live with.
photo by Alena Darmel
Review your copy of the appraisal
While you won't know the home you're making an offer on inside and out, it's still important to review the contents of the appraisal to make sure they've included accurate information. If they've missed upgrades or used bad comps, it could be grounds for a second appraisal.
Ask your lender for a second appraisal
Your lender will review the information in the appraisal as well, so if they find inaccuracies or something that can cause loan eligibility, they may attempt to address the concerns with the appraiser. If a resolution can't be reached, they may order a second appraisal.
Negotiate the price
You can also try to negotiate the price of the home with the seller. First, ask if they'll lower the price to match the appraisal. If that doesn't work, you can offer to meet them halfway by coming to the table with 50% of the difference if they'll come down in price the other 50%.
Bring cash to the closing table to make up the difference
If negotiations aren't fruitful with the seller, you may need to come up with the cash to cover the appraisal gap (the difference in the asking price and appraisal) if you want to save the deal. If additional funds are unavailable, you might consider reducing your downpayment to make up the difference or request a financial gift from friends or family.
Consider an all-cash offer
One of the least viable options will be to make an all-cash offer on the home. The main reason is simply that most homebuyers don't have the kind of cash lying around to purchase a home. If you do, however, offering to purchase the home with cash not only allows for a faster closing which is attractive to the seller, but you may also be able to negotiate the price using all-cash as leverage.
Seller and buyer cancel the home purchase contract
If all else fails, it may be in both the buyer's and seller's best interest to back out of the deal. This comes with a few issues to contend with, though. The first is as the buyer, backing out of the deal may mean losing your good faith deposit, also known as earnest money if you didn't have an appraisal contingency in place.
With the market as hot as it is for sellers right now, home prices are high and appraisals are having a hard time catching up with the market. This increases the possibility for inaccurate appraisals so appraisal contingencies are becoming more commonplace in purchase contracts. The contingency allows the buyer to review the situation and back out of the deal without losing earnest money.
Know how much home you can afford
Before you start your home search, we always recommend getting pre-approval to know exactly how much home you qualify for. This allows you to stay within budget, have stronger offers to sellers and understand what your buying power is. But, before you do that, get an idea of what you could qualify for by using our free mortgage calculator to see how much home you could afford.
What happens if the appraisal is higher than the asking price?
If the appraisal comes in above the asking price, the only people that will ever be informed are the buyers and their real estate agent. The sellers are only notified if the appraisal is below the asking price. So, congratulations! You're starting out with equity in your home!
Should you ever pay more than appraised value for a home?
In housing markets with low inventory and high demand, "FOMO" or the fear of missing out is a real thing. But so is "Buyer's Remorse". If you've lost offers on several homes, it can become frustrating and you may think you'll never get a home if you don't outbid other potential buyers.
But it's important to be honest with yourself before you make a large financial decision you may regret later.
First, ask yourself this question - can you afford the mortgage? If the appraisal comes in low and you have to cover the difference by using more funds than expected, will you be able to comfortably make your monthly payments?
Next, how long do you plan to live in the home? Paying more than the appraised value means you'll need to stay in the home long enough to build equity in the home. If you decide to sell early or are forced to sell early due to unforeseen circumstances, it could cost you money instead of making you money.
Keep in mind that your mortgage lender will only loan you what the home is appraised for and in a lot of cases, only finance 80% of the appraised value. Stay focused and keep your budget in mind when considering the risk of paying more than what the home is worth.
photo by Kindel Media
Conclusion
Low home appraisals aren't a rare occurrence and can happen to anyone. As we've discussed, there are multiple options for both the home seller and home buyer to avoid dealing with the stress of a home being appraised low. But if it should happen to you, your real estate agent should be well-versed in these circumstances to help advise you on how to proceed.
sarah@charlestonsbesthometeam.com