Navigating the appraisal process is a crucial step as you approach the final stages of purchasing or refinancing your home. Often overlooked by many homebuyers, the significance of a home appraisal only becomes apparent when issues arise.

We’re here to guide you through the implications of a low appraisal and explore possible solutions if your current home or potential new home is valued lower than expected. We will also delve into common situations that arise from a low appraisal and offer strategic advice to both buyers and sellers on how to effectively handle these challenges.

First, let’s clarify what a low appraisal really entails and why it matters.

Understanding the Impact of a Low Home Appraisal

When a property’s appraisal value is lower than the price initially agreed upon by the buyer and seller, it is considered to have “appraised low.” This appraisal reflects the home appraiser’s judgment of the property’s current market value, informed by comparable recently sold properties in the vicinity.

If the appraisal value falls short of the agreed purchase price, it restricts the amount a lender is willing to finance, as loans are typically based on the appraised value. Such a discrepancy can potentially postpone or even jeopardize the finalization of your home purchase.
Although a low appraisal may seem concerning, remember that your real estate agent is equipped to guide you through the appraisal process effectively and help maintain the momentum towards a successful closing.

Reasons Behind Low Home Appraisals

Several elements can negatively impact a home’s appraisal value. Let’s explore the usual suspects behind a low appraisal:

• Out-of-Date Comparables: Ensure that the most recent data on similar properties is used, as accurate and up-to-date information is crucial for a reliable appraisal. In a market where homes often sell above the listed price, having the latest data is essential, especially if you’re selling in a highly competitive area.

• Exclusion of Home Improvements: If an appraiser overlooks significant upgrades or fails to find comparable properties that reflect these improvements, the appraisal might undervalue your home, leading to a less precise figure.

• Rapidly Appreciating Local Market: Low appraisals can also arise in neighborhoods where home values are quickly rising. If homes have appreciated significantly, the comparables used may not catch up to the current asking prices, skewing the appraisal low.

• Appealing a Low Appraisal: Remember, if your home’s appraisal is lower than expected and feels incorrect, there are steps you can take to challenge the appraisal.

What Should You Do When the Appraisal Falls Below the Asking Price?

Encountering an appraisal lower than the agreed purchase price can present significant challenges for both buyers and sellers. In such cases, a buyer’s mortgage lender will not approve a loan amount exceeding the appraised value of the property.
This limitation is largely due to lenders adhering to strict loan guidelines that use the appraised value to determine the loan-to-value (LTV) ratio. Consider this scenario: You’re buying a home priced at $200,000 with a conventional loan, which allows a maximum LTV of 97%, equaling $194,000. If the property is appraised at just $190,000, you would need to bridge the $4,000 shortfall to secure your financing.

Steps to Take if Your Home Appraisal Comes in Low

Should you encounter a low appraisal, there are several proactive steps you can take.

• Seek a Reevaluation: Your real estate agent is instrumental in addressing a low appraisal. They can challenge inaccuracies such as incorrect measurements or overlooked enhancements like garages, sheds, or recent upgrades. By presenting evidence of these errors to the lender, your agent can work towards rectifying the appraisal and keeping the transaction on track. Be prepared for potential delays and additional costs for a new appraisal based on this corrected information.

• Addressing the Appraisal Directly: If errors or oversights aren’t clearly evident, it’s unlikely that lenders will entertain a second appraisal request without substantial proof of discrepancies.

• Compensate with Additional Funds: In a seller’s market, where sellers have the upper hand, they may not reduce their asking price due to a low appraisal. Buyers might need to cover the shortfall between the appraised value and the sale price in cash.

• Renegotiate the Deal: Conversely, in a buyer’s market, where buyers have more leverage, a seller eager to close may agree to renegotiate the selling price. As a buyer, it’s worth attempting to negotiate a revised price that reflects the appraised value.

• Utilize the Appraisal Contingency: If your contract includes an appraisal contingency, you can utilize this clause to safeguard against a low appraisal. This allows you to renegotiate the price or withdraw from the purchase while reclaiming your earnest money deposit if an agreement can’t be reached.

• Option to Withdraw: If financial adjustments aren’t feasible, and neither party is willing to compromise on the price, walking away might be your only option. Without an appraisal contingency, this decision might result in the loss of your earnest money deposit.

In situations where you opt to walk away, consider it a protective measure. Purchasing a property at a price higher than its worth could lead to negative equity, making it difficult to sell without incurring losses or refinancing due to a high loan-to-value ratio.

How to Engage with a Seller Following a Low Home Appraisal

When faced with a low appraisal, sellers are eager to keep their home sale on track, fully aware that a low valuation can undermine their desired asking price. Additionally, an appraisal contingency clause in the contract allows buyers to withdraw from the sale without forfeiting their earnest money deposit, posing another risk for sellers.

In such cases, engaging in negotiations becomes a strategic move for both the buyer and seller. Here are some steps you can take to initiate the negotiation process:

• Consult with your lender about the possibility of obtaining a second appraisal. Remember, you will need to provide further evidence that the initial appraisal was inadequate.
• Discuss a potential reduction in the asking price with the seller.
• Communicate with your real estate agent for guidance.
• Prepare by conducting thorough research to understand your bargaining position.

Strategies to Sidestep a Low Home Appraisal

Although low appraisals are not typical, being ready for one is crucial to avoid surprises. Whether you’re in the market to buy or sell, equipping yourself with the right strategies ensures the appraisal process runs smoothly and your real estate transaction remains intact.

Guidance for Sellers

To prevent a low appraisal as a seller, preparation is your best tool. Simplify the appraiser’s job and stay proactive throughout the appraisal process.

Key initial steps to prepare effectively include:

• Thoroughly ready your property, both inside and out.
• Be available to address any queries from the appraiser.
• Compile a detailed list of property improvements and their completion dates.

Advice for Buyers

Once you’ve committed to a property with a purchase agreement and a deposit, you’re financially tied to its success. A low appraisal can disrupt your plans unless you have a contingency strategy.

Here are strategies to manage a low appraisal effectively:

• Consider your initial offer carefully.
• Examine the appraisal report closely.
• Discuss the possibility of a second appraisal with your lender.
• Try to renegotiate the sale price.
• Be prepared to cover any shortfall with additional cash at closing.
• Explore making an all-cash bid to strengthen your position.

Conclusion

Navigating the home-buying journey involves many crucial steps, one of which is the home appraisal. When appraisals come in lower than expected, it can temporarily stall the process. However, with proactive collaboration between you, your real estate agent, and your lender, most of these hurdles can be effectively overcome, allowing you to progress smoothly towards closing.