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When a Home’s Value Is Lower Than Your Offer

What exactly is an appraisal and why is it so important?

An appraisal is the best way to estimate your property's fair market value based on the location, condition and recent sales of similar home in the surrounding area. Beyond an estimate of how much your property is worth, an appraisal also indicates the amount a lender will let you borrow for a property.

Why is having an appraisal so important?

  • A home appraisal ensures that you don’t overpay for a property
  • Most mortgage programs require home appraisals
  • Appraisals may identify other problems with the property, such as zoning issues

What does a home appraisal include in its findings?

  • Explanation of the valuation – Like math students, good appraisers show their work
  • Summary of the home’s characteristics – Its condition, size and any improvements that have been carried out
  • Other considerations – Has anything else about the home or its neighborhood affected the valuation?
  • Structural problems and defects – Any issues that the appraiser noticed that affected her valuation

Why an appraisal can come in low

The reasons for a low appraisal generally fall into one of the following categories:

Real Estate Market

  • Property sales prices are trending downward due to a weak economy or overbuilding
  • Property prices have begun to recover from the short-term downturn, with market values rising ahead of recent sales comparables
  • Short sales, foreclosure, and REOs (real estate owned by the bank or lender) can artificially skew property values downward

Opportunistic Seller or Inexperienced Buyer

  • Seller thinks the property is worth more than it is really worth based on current market trends
  • Buyer becomes emotionally involved in the property purchase, instead of viewing the property as an asset that generates cash flow
  • Seller and buyer work out a “side deal” where the buyer pays above market, then receives a credit back from the seller, which inflates the purchase price above the fair market appraised value

Mistakes by the Appraiser or Lender can happen

  • Inexperienced appraiser overlooks economic factors that influence property values in the local market, such as a new major employer coming into town that will increase the demand for rental housing.
  • Underwriter or appraiser made a material error affecting property value, such as not including the value of a recent capital repair or using the wrong square footage.
  • Appraiser does not consider pending sales that may be a better indicator of “real time” property values than recent comparable sales
Image credit: Max Vakhtbovych from Pexels

Appraisal Gap Strategy

There are several things a buyer and seller can do to prevent a low home appraisal before it even happens.

  • Ensure the proper is listed at the right price and the offer is at fair market value. Have your real estate agent pull comparable from the local MLS (Multiple Listing Service). Research recent home sales on Zillow and various sites.
  • Order a pre-listing appraisal if you’re the seller, then provide the buyer with a copy to give to the lender and appraiser when the property goes under contract.
  • Ask your lender to make sure the appraiser has experience working in the part of town your property is in.

If the appraisal still comes in low despite your best efforts, you can always try to renegotiate the deal. In many real estate markets today, sellers know that qualified buyers can be hard to find.

Image credit: RODNAE Productions from Pexels

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