A low appraisal is when an appraiser values your home for less than the agreed-upon selling price, which can be disappointing if you're relying on the sale proceeds to fund the purchase of your next home. A low appraisal can occur for a variety of reasons, so it's important to first review your appraisal report to identify any inaccuracies or overlooked areas that could be challenged.
In this article, we'll take a closer look at factors that can affect your appraised value, including market conditions, the physical condition of your home, and miscalculations by an appraiser.
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What is a low rating?
A home appraisal is usually a report by an independent appraiser who assesses the value of a property. If the appraiser evaluates the property and values it lower than expected, you will have a low home appraisal.
What causes the low rating?
There are a few factors that can lead to a low appraisal: In most cases, a low appraisal will occur if the appraiser believes the property has defects, such as outdated finishes or not enough bedrooms, that make it less worth the agreed upon purchase price.
A low home appraisal can be stressful for homeowners because it gives them a low estimate of how much their home is worth. This low appraisal can affect selling or refinancing plans due to an insufficient loan-to-value ratio. A low appraisal can also be an obstacle if a homeowner wants to leverage their home equity.
However, it is important to know that a low appraisal does not necessarily mean there is bad blood between buyers and sellers. It all depends on the local market and the specific home situation. Similarly, home appraisals are done by independent professionals, so it is important to understand that a low appraisal is a combination of these two factors.
This can result in a large discrepancy between the appraised value and the market price.
How often do low ratings occur?
It's not uncommon for a home to be appraised at a low value in a real estate transaction, and further negotiations may be required to reach a satisfactory agreement between buyer and seller, but that doesn't mean it's completely common.
According to Fannie Mae, low appraisals occur in less than 8% of cases, and many low appraisals can be disputed and renegotiated. As mentioned above, how often you get a low appraisal depends on these factors (and others):
Local Market Neighborhood Conditions Independent Appraisers
While low appraisals are rare, you should consider the possibility of this issue when searching for your dream property. While it may cause a slight hiccup in your home buying process, it won't ruin it completely.
How is the evaluation carried out?
To understand this part of the home buying process, it helps to have a practical understanding of how a home appraisal works from start to finish. Let's start with a textbook definition: A home appraisal is a systematic process used by real estate professionals to determine the estimated value of a home.
The process typically begins with an appraiser visiting and thoroughly inspecting the home, who will document the home's condition and features and gather additional information about nearby home sales.
The appraiser then compares similar home sales and adjusts for those differences to create a figure that reflects what someone would pay for the home if it were put on the market. This figure is considered the home's estimated value. It then becomes part of an official report used to evaluate various legal and financial issues related to real estate ownership.
What happens if my home is undervalued?
If your home was appraised lower than expected, your next steps will depend on why your home was appraised: If issues like poor condition, old appliances, or general wear and tear were the cause, you'll need to address those issues before you can get another appraisal.
Similarly, appraisals can be low in a hot market. If the reason for the low appraisal is due to market trends, the borrower may be able to negotiate with the lender or find new financing options. It may also be that the homebuyer needs to come up with a larger down payment or invest additional funds in home improvements if they want the lender to approve their current loan.
Either way, understanding the necessary steps and consulting with an experienced real estate professional are important measures home buyers can take to ensure the best outcome when it comes to a home appraisal. And don't worry too much; this doesn't usually mean the end of the road for you and your dream home.
Can a seller back out of a contract if the appraisal is low? No, only a buyer can back out of a contract if the appraisal is low. In some cases, this may be possible if you have an appraisal condition in your contract, but this is rare.
What to do if your valuation is low
If your appraisal is low and the seller won't budge, what do you do next? Here are three tips on what to do if you get a low appraisal when selling your home.
Let's take another look
Are you racking your brains thinking, “What if the appraisal is low?” Instead of guessing why your home appraisal is low, take a deep look at the reasons why.
Trust us, it’s natural to feel frustrated when your home has a low appraisal, but by taking another look at what’s causing the low value, you can identify what you need to fix to increase your appraisal.
A common problem that lowers your assessed value is deferred maintenance, repairs, renovations, and upgrades that don't add value. With a little effort and a few fixes, you may be able to raise your assessed value back up to where you expected it to be.
Renegotiate the purchase price
There is still a chance to renegotiate the purchase price, which could allow you and the seller to come to a win-win agreement. It is also a good idea to investigate why the appraisal is low, as it could be that the appraiser made a miscalculation.
To renegotiate, make sure you have all the facts straight. Talk calmly with the seller and let them know you're serious about reaching a suitable agreement. The most important thing to remember is that both parties must work toward an agreement that suits everyone's needs.
Both parties should discuss the pros and cons of maintaining or renegotiating the original purchase price. Openly exploring all options will produce the best outcome for all parties involved. This could include aligning the settlement date or incentives associated with reaching an agreeable renegotiated purchase price.
It's also important to follow real estate laws when renegotiating your contract, so it's a good idea to consult with an experienced attorney. If you're buying or selling a home through a real estate agent, they should also be able to help you figure out how to lower the price after the appraisal (or if that's the right way to do it).
Understand that buyers might walk away
Finally, understand that the buyer may walk away if you can't agree on a new price or resolve the issues that led to the low appraisal.
If the appraisal reveals defects in the property or other factors that would cause the home's value to fall below the asking price, the buyer may lose confidence in purchasing the home. When this situation occurs, it is usually best for both parties to take a step back, reevaluate, and possibly renegotiate the terms of the sale, as mentioned above.
If you are the buyer and can make additional repairs or other mitigating measures, consider them. This is especially true if you are in a buyer's market and have many other options for buyers to choose from at this time. Overall, trying to reach an agreement will ensure that all parties involved are satisfied with the outcome.
Tips for negotiating a lower appraisal
So what do you do if the appraisal is low and you end up buying the house? You have a few options, but it's important to remember that you usually have the power. If you've exhausted all your options and the seller won't agree to renegotiate the sale price, you have two main options:
Request a reconsideration
Typically, only two parties can dispute a home appraisal: the appraiser's client (usually the lender) and the buyer. In this context, this means you can request a re-examination or a second appraisal. Appraisers take great care to ensure their appraisals are accurate and comprehensive, so any dispute or re-examination must have a valid basis.
But that doesn't mean mistakes don't happen. Some of the most common mistakes appraisers make include miscalculating the square footage of a home or leaving out important hidden features that increase a home's value. If you think the appraisal is too far off from the asking price or the home's actual value, talk to your agent and ask for a reconsideration.
Consider an all-cash offer
As a last resort, you may consider making an all-cash offer. By paying full amount up front, the seller doesn't need bank approval or an appraisal to close the deal, eliminating the risk of the deal falling through because the appraisal is lower than expected.
Plus, a cash payment offer will usually outperform other offers in terms of speed and competitiveness because all parties are confident that the agreed upon funds will be paid in full, meaning you may be able to close on the purchase of your dream home quicker than other potential buyers.
Tips for sellers to avoid low appraisals
Now, if you're a seller and you want to avoid a low home appraisal, what can you do? One of the most important steps is to get a pre-sale inspection. A pre-sale inspection determines if there are any issues with the home before it goes to the appraiser. This allows you to address and repair any issues that may come up during the appraisal process.
Additionally, it helps to provide evidence of any necessary repairs you've made over the years to maintain the condition of your home, and you should do this as part of preparing your home to sell, regardless of the appraised value.
For example, providing receipts or other documentation showing past maintenance and renovations to your home will provide assurance that the home has been properly maintained, which will increase the home's overall value.
What about making new repairs or renovations right before selling your home? Ultimately it depends on the market, what buyers are looking for, and what upgrades you want to make. Overall, we recommend that you avoid spending too much on unnecessary repairs, which can lead to losing money in the long run.
The bottom line is that you can avoid having your home appraised at a low value if you prepare well in advance.
Sell your home on your terms
So what do you do if your home is under-appraised? Know that it's not your only option. In fact, selling your home on your own terms is your best option these days.
Selling a home can be stressful and time-consuming, especially when you're putting it up for sale. To eliminate those worries and get fast cash for your property, buy it for cash. No need to get an appraisal or open the door to strangers during a showing.
Plus, cash offers are typically available within days or weeks, not months like a traditional sale on the market, so you don't have to wait until the transaction has closed. Getting a cash offer can take the stress out of selling. Just enter your home address into our home valuation tool (along with other information like size and age) to see what it's worth.
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