The Appraisal Came in Low - Now What?

A low appraisal may seem like a major misfortune when you’re selling your house — both for you and for your buyer. But low real estate appraisals are more common than you think. According to the Zillow Group Consumer Housing Trends Report 2018, among sellers who sold in the past 12 months and had a deal fall through, 10 percent said it happened because the appraisal was lower than the purchase price.

A low appraisal doesn’t always mean a canceled deal. It sometimes means you have to pivot and renegotiate. Read on for our tips on how to handle a low appraisal.


What can sellers do after a low appraisal?

  • Request a copy of the appraisal.

  • Ask the buyer to challenge the appraisal.

  • Renegotiate the sale price with the buyer.

  • Offer seller financing.

  • Cancel and relist.

  • Consider an alternative all-cash offer.


What is an appraisal on a home?

An appraisal is a professional report that helps gauge a home’s value. Any homeowner can get a home appraisal at any time.

For example, if a homeowner is refinancing their mortgage, an appraisal is usually required. But the most common time an appraisal is performed is when you’re selling. If the person buying your home is financing the purchase, their lender orders an appraisal to ensure that the house is worth the amount the bank is agreeing to finance. It’s one of the final steps in the home-buying process, and it’s an important factor to the sale going through.


How much is a home appraisal?

Home appraisals typically cost between $300 and $600, and they’re ordered by the lender and paid for by the buyer.


What is a home appraisal contingency during a home purchase?

Appraisals are a standard part of the home-buying process, and they protect the buyer’s lender from offering too much money for a home that isn’t worth the cost. While this may seem like a formality, in hot real estate markets, bidding wars can drive home sale prices well above the true value, which is a red flag for lenders.

A home appraisal contingency is an addendum to the offer contract a buyer submits. It states that if the appraisal comes back low, the buyer has the option to back out of the deal and get their earnest money back.

What the lender is looking for is a healthy loan-to-value ratio, often abbreviated as LTV. It’s a risk assessment calculation of the amount of money they’ll be financing in the mortgage (not the sale price), divided by the appraised value. Generally speaking, here’s what your appraisal outcome means:

  • Appraisal is greater than offer: If the home appraises for more than the agreed-upon sale price, you’re in the clear.

  • Appraisal is lower than the offer: If the home appraises for less than the agreed-upon sale price, the lender won’t approve the loan. In this situation, buyers and sellers need to come to a mutually beneficial solution that will hold the deal together — more on that later.


Do buyers ever waive the appraisal contingency?


Some all-cash buyers who are home shopping in a competitive sellers market (where there are many buyers vying for relatively few homes) will waive the appraisal contingency to make their offer more attractive for the seller. Cash buyers may decide to skip an appraisal altogether, they might have an appraisal done just for their own knowledge (without a contingency), or they may still submit an appraisal contingency, just as a non-cash buyer would do. It’s up to the individual cash buyer.


How is a house appraised?

In a home purchase, appraisals are completed by a third-party licensed appraiser who is hired by the lender. The appraiser is typically chosen at random and can’t be connected to the transaction in any way or have any relationship with the buyer or seller. The appraisal happens sometime between the time the home goes under contract and the projected close date.

During the appraisal, the appraiser walks the property — both the interior and exterior — taking photos and notes. After the on-site evaluation, the appraiser writes a report, combining their notes on the home’s condition with local valuation information. The result is a final document that identifies the appraised value of the home.

  • Conventional loan appraisals are usually around 10 pages long and take about a week to complete.

  • FHA loan appraisals often take a bit longer, because they’re government-backed and require more documentation. For example, FHA appraisals must include documentation that the home meets minimum property guidelines for health and safety.

  • VA loan appraisals, like FHA loan appraisals, may take a bit longer, as they also have minimum property requirements for things like adequate living space, safe mechanicals, adequate heat and water availability.

It’s important to note that since the lender orders the appraisal and the buyer pays for it, neither party is obligated to share the actual report with the seller.


What is a drive-by appraisal?


Also called a summary appraisal, a drive-by appraisal is an exterior inspection only, combined with local valuation info. They usually cost less than a full appraisal but may not be accepted by a lender. Most lenders require a full interior and exterior appraisal.


What do home appraisers look for?

Remember that an appraisal is not the same as a home inspection. While an appraiser and a home inspector may look at the same features of your home, an appraiser won’t necessarily test the functionality of all your home’s systems, nor will they flag specific items of concern. What the appraiser is concerned with is determining the condition of the home and, therefore, its value.

While they’re not looking for things to fix, here’s what appraisers are looking at:

  • Age or condition of the home: Newer homes are typically worth more, because the major systems are in better working order.

  • Size and square footage: An appraiser will determine a price per square foot of usable or livable space.

  • Completed upgrades or improvements: A value will be attached to the enhancements you’ve done on the home, calculating a return on investment (ROI).

  • Needed repairs that impact value: If your home needs major repairs — damaged roof or basement water damage, for example — those will be taken into consideration.

  • Amenities or special features: They’ll pay attention to valuable features, like a pool, home theater or mother-in-law suite.

  • Construction details: The appraiser will see if the home has modern materials, up-to-date insulation or energy-efficient windows that will impact the home’s value.

  • Lot size or zoning: Lot size can affect the value of the home, as can zoning restrictions or opportunities.

  • Comparables: The appraiser will run comps just like a real estate agent would when doing a comparative market analysis on your home. They’ll look at recent sales of homes that are similar to the one you’re looking for to help determine value.

  • Location: They’ll look for school district ratings, nearby amenities, and proximity to major metro areas and public transportation.

  • Local housing market: An appraiser will take the state of your local real estate market into consideration. Are home values rising or declining? Is it a sellers or a buyers market? How long are homes taking to sell?


Common reasons for a low appraisal

There are quite a few reasons your home’s appraisal might come in lower than you expect. Here are some of the common culprits.


Rising market or sellers market

In a sellers market, bidding wars often drive home sale prices higher than appraisals can support.


Slowing or buyers market

In a buyers market (and especially a market that has recently shifted), sellers may mistakenly overprice their home because they’re not aware of how much their value has decreased. A glut of foreclosures and distressed homes in your area can also affect your home’s value.


Inexperienced appraiser

A poorly trained appraiser or someone who’s unfamiliar with the intricacies of your local market can produce a low appraisal.


Poor evaluation of the property

An appraiser fails to take upgrades, popular features or upscale amenities into account.


Inaccurate comps

An appraiser is using comparables that aren’t a great match with the home being appraised. Comps should be both recent and similar. They should also only be using sold homes, not homes that are currently on the market.


Closing cost credits

If you’ve already negotiated a closing cost credit and the purchase price is higher to reflect the cash back the buyer will receive at closing, it can mean your appraisal has to come in higher than it would have otherwise.


What happens after an appraisal comes in low?

If the house appraisal comes back lower than the purchase price, the buyer has a few options to keep the deal alive.


Make up the difference in cash

The buyer can increase their down payment to make up the difference. For example, if the buyer needed the appraisal to come in at $300,000 but it comes in at $290,000, the buyer can pay the $10,000 difference in cash. What the lender is concerned about is the ratio of the loan to the appraised value of the home, not necessarily the purchase price.


Shift some down payment to make up the difference

Let’s say the buyer was planning on putting $60,000 down on a $300,000 home (a 20 percent down payment). If the appraisal comes in $10,000 low, the buyer could shift $10,000 of the money they’ve set aside for their down payment to make up the difference.

The downside is that they’ll be putting less than 20 percent down and will have to pay private mortgage insurance (PMI) every month until their equity in the home’s loan-to-value ratio is 20 percent. Of course, this arrangement is subject to the buyer’s lender approving the smaller down payment and greater loan amount.


Appeal the appraisal

As the person who paid for the appraisal, the buyer can ask their lender to challenge the appraisal if they believe the appraiser used incorrect information or bad comps, or if they weren’t familiar enough with the area.


Cancel the contract

Not an ideal situation for you or the buyer, but if the buyer signed an appraisal contingency, they can cancel the contract and walk away from the deal.


How can sellers prevent a low appraisal?

We’ve talked about the options a buyer has to tackle a low appraisal, but what can you, as the seller, do to help encourage the deal to move forward? There are a few actions you can take, all before the appraisal. Remember, appraisals are subjective, so it’s important to prepare for a low appraisal, just in case.

If you luck out and accept an offer from an all-cash buyer, you can avoid the appraisal contingency completely — or at least lessen the potential of a low appraisal harming your deal. According to Zillow research, nearly a quarter (23 percent) of all buyers pay cash.

One way to guarantee a cash sale is to sell your home through Zillow Offers. You can sell your house quickly, without an appraisal, directly to Zillow. Simply answer some questions about your home, and if it’s eligible, we’ll present you with a cash offer.


Show your comps

If you hired a real estate agent, they should have given you a comparative market analysis (CMA) when you were first deciding on a listing price, along with comps to prove your home’s value. Keep copies of the comps and give them to the appraiser when they arrive at the home.

Bring receipts

If you’ve had your land surveyed, done any major improvements or renovated, have receipts handy for the appraiser so they can calculate the added value.


Clean up

One of the most important things that an appraiser assesses is the condition of your home, so make sure it looks clean, tidy and well-maintained. Clean the gutters, touch up paint, clean thoroughly and make sure major systems are operational. You’ll also want to make sure your smoke and carbon monoxide detectors are functioning. It’s likely you already took some of these steps when you got your house ready to list, but if your home has been on the market for a while, it’s worth doing another deep clean.


How can sellers overcome a low appraisal?

If you’ve followed the pre-appraisal tips above and your appraisal still comes in low, here are some actions you can take to course correct.


Request a copy of the appraisal

Ask the buyer or their agent for the appraisal report if you believe there is misinformation in it. If they’re willing to share a copy of it with you, go through and make sure that factual items are correct. Ultimately, it’s up to the buyer and their agent to report misinformation if it’s found, but the more you can work together, the more likely the deal is to move forward.


Ask the buyer to challenge the appraisal

If the buyer is willing to challenge the appraisal, provide any documentation that could help them make your case, including comps, receipts, information on market conditions, or proof that the appraiser was unfamiliar with your area. You’ll also want to point out exactly which parts of the appraisal are being disputed. Typically, it will be the buyer’s real estate agent who brings up the dispute with the lender.

If the lender agrees that the first appraisal is inaccurate, they may order a second appraisal. Again, the buyer would be responsible for paying, but you can always offer to split the cost with the buyer as a good faith effort to keep the deal together.


Be open to negotiations

Unless your buyer was looking for a reason to walk away, they likely want the deal to stay together as much as you do. So that’s when a second round of negotiations can begin. The ball’s in the seller’s court here — it’s up to you to decide if you’re willing to renegotiate the sale price so that it aligns with the appraisal outcome. Your decision depends on your financial situation and the state of your local real estate market (if you’re selling in a buyers market, you may be better off renegotiating than starting over and trying to find a new buyer).

Keep an open mind when it comes to meeting in the middle. For example, you may not have to cover the entire difference between the sale price and the appraisal. If you’ve agreed to sell the house for $250,000 and it appraises at $230,000, you and the buyer could meet in the middle. You could lower the sale price to $240,000, and they could come up with an additional $10,000 out of pocket to satisfy the lender.


Offer seller financing

If the buyer can’t come up with the difference but you know your home is worth more than what it appraised at, you can offer them seller financing for the difference — assuming you have enough cash. You’d essentially loan them the money, taking payments either in regular installments or in a lump sum down the road. If you’re interested in pursuing this option, make sure to involve a lawyer.


Cancel and relist in a sellers market

If you’re positive the appraisal came in lower than it should have but your buyer isn’t willing to challenge it (or if the challenge fails), you may have to let the deal go. If you aren’t in a rush to sell, you might consider waiting to find a new buyer once market conditions improve — consider selling in the spring, when the market tends to move faster.

If you have no choice but to relist in short order and you received multiple offers the first time around, you may be able to retain your existing sale price and find a new buyer who is willing to pay the difference — or perhaps your appraisal will come in higher next time! Or, if you’re in a hurry to sell, you may consider relisting with a lower starting sale price next time around.

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