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How to avoid a low home appraisal

How to avoid a low appraisal
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Home appraisals are conducted by a professional appraiser to give an estimate of the market value of a house or property. Usually they’re done at the request of a lender considering your application for a new or refinanced mortgage.

In some instances, home appraisals can come in low because values have declined in the neighborhood, improvements need to be made to the dwelling or the buyer has simply offered too much. A lower home appraisal can derail a potential sale when a lender won’t agree to provide the full amount of financing the buyer needs to close the deal.

Why home appraisals are important

Appraisals are important to mortgage lenders because they ensure that they do not approve a loan for a borrower for more money than the property is worth, says Al Graham, regional manager, Georgia, Alabama and Florida, for Silverton Mortgage. The appraisal also protects the buyer from overpaying for a property.

Lenders also use home appraisals to help borrowers determine the current value of properties they want to purchase and how much they can reasonably spend, says Rose Sklar of The Sklar Team with Coldwell Banker Realty in Weston, Florida.

Homeowners also seek appraisals when refinancing their mortgage or obtaining a home equity loan or a home equity line of credit.

“Generally, the loan-to-value ratio is determined by the lower of the appraised value or the purchase price for a purchase transaction,” says Matt Hackett, operations manager of Equity Now, a New York-based direct mortgage lender. “For refinancing, the loan-to-value is determined by the appraised value. This ratio is very important from both a qualification and pricing standpoint.”

Why avoiding a low home appraisal is important

A low home appraisal could delay your home sale, which can be problematic if you have started the process of buying another home. If you have immediate changes planned such as moving for a job or a divorce, a low appraisal can make it harder to sell your house at the price you had hoped for.

A low appraisal also means the house could be on the market for a longer period. Buyers are sometimes deterred by homes that linger on the market for many weeks, perceiving that there are problems with the house or asking price. Currently though, the housing market is especially competitive, so this may be less of a concern for most sellers than it was pre-pandemic.

What causes low appraisals

Many factors can figure into a low appraisal. Here is how you can combat some of the most common problems:

A home’s appearance matters

A dirty or ugly home will usually affect your appraisal negatively, Graham says.

How to avoid:  Before you list your property, consider having it professionally cleaned both inside and out and staged not only for prospective buyers, but for appraisers as well, Graham says. Don’t forget areas such as the attic, basement and garage, especially if they are unused. Clean up and mow the yard, touch up the paint and pack up your tchotchkes.

Changing market conditions

Appraisers use comparable houses known as “comps” in the general area to help determine the value of a property. Since market conditions change so rapidly, a comp that is more than a month or so old may no longer be relevant in the current market, Graham says.

How to avoid: Do your research on how fast or slow values of homes change in the area. There might be times when sales slow such as the end of summer or winter when fewer people are looking to purchase a house.

Lack of recent comps

A lack of recent sales of comparable properties in the area could dramatically affect the appraised value, Graham says.

You might live in a neighborhood where homes are rarely sold or in a new part of town that is still being developed. If you live in a fairly new high rise and few condos have been sold to a second owner, that could impact your appraisal as well.

Many times there are not enough closed sales in the area to choose from, Sklar says.

“Banks typically only go back three months,” Sklar says. “When home sales slow down, good comps age very quickly, many times leaving no comparables to choose from and causing a low appraised value.”

How to avoid: Check out the number of home sales in your area and what time of year most of them occur. If you can wait, try selling your house during those periods of the year.

Disconnect between the appraiser and the buyer

A home may be worth that extra $5,000 because it’s in the buyer’s preferred school district or on the same street as a relative, but the appraiser does not take sentimental value into account, Graham says.

How to avoid: This could be harder to avoid because it is often personal in nature.

Unrealistic expectations

Appraisers look at the comparable sales in the neighborhood and generally “bracket sales with a lower sale, a higher sale and a very similar sale and arrive at a number they deem fit,” Hackett says.

The reasons for low appraisals are generally more due to an unrealistic idea of value than anything cosmetic,” Hackett says. “Appraisers are human and they will generally react more favorably to a well-maintained home.”

How to avoid: Look at the prices of homes sold within the past month that are similar in size and age to determine a range for your appraisal before it is conducted.

How often do home appraisals come in low?

Low home appraisals do not occur often. According to Fannie Mae, appraisals come in low less than 8 percent of the time, and many of these low appraisals are renegotiated higher after an appeal, Graham says.

How often a home appraisal comes in low generally depends on the neighborhood and market conditions. The majority of appraisals tend to come in at the right value, Sklar says.

“Those that come in low in today’s market are often a result of other properties or units that have not been upgraded, causing low comparables that are in turn used by the appraiser,” Sklar says. “Always check your appraisal over and make sure that the comparable uses are fair and just.”

To head off a low appraisal, Sklar recommends that the real estate agent meet the appraiser at the property to point out any upgrades the homeowner made, with recent receipts as evidence.

“It is also a good idea to try and get an appraiser who is familiar with your area,” Sklar says.

What you can do if the appraisal comes back low 

Ultimately, the buyer has three choices if the appraisal turns out lower than expected: 

  1. Negotiate a lower price with the seller
  2. Pay the difference between the list price and the amount your lender is willing to finance
  3. Walk away from the transaction 

If you decide to withdraw your purchase offer, you could lose some or all of your earnest money deposit, unless you have appraisal contingency that allows you to walk away in the event of a low appraisal and get your deposit back.

You’re also allowed to challenge the appraisal and provide any additional comparatives for consideration, Sklar says.

However, homeowners cannot shop for appraisals and simply get a second one, Hackett adds.

“As a lender, we are not permitted to get a second appraisal unless the first appraisal is grossly incorrect,” Hackett says. “This would be extremely rare, as the lender is selecting the appraisal or at least the appraisal management company. We do a tremendous amount of due diligence on appraisers before engaging them, as they are determining the value of collateral supporting the loan and are crucial to the lending process.”

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Written by
Ellen Chang
Contributing writer
Ellen Chang is a former contributor for Bankrate. Chang focused her articles on mortgages, home buying and real estate. Her byline has appeared in national business publications, including CBS News, Yahoo Finance and MSN Money.
Edited by
Mortgage editor
Reviewed by
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