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Dealing with Low Appraisals

Dealing With Low Appraisals

In a For Sale by Owner Seller's Market (very few homes to choose from, lots of buyers) multiple offer situations will often push the selling price up higher than any comparable sales in the area. Because appraisers use recent comparable sales in their report, sellers worry that the appraised price can come in lower than the offer. 

In a Buyer's Market (lots of homes to choose from, very few buyers) prices are low and more flexible. FSBO Sellers are also concerned about the appraised value at this point as well. Many recent comparables will have a lower sale value, so this may bring down the appraised value. 

Low appraisals can happen in any market. Don't panic! A low appraisal does not necessarily mean the loss of a pending sale.

There are several reasons for low appraisals and several options available to both the buyer and the seller.

Why do low appraisals happen?

Low appraisals are made as a result of many factors. A few of them are listed below.

Multiple Offers:
Several buyers interested in the same home, all write offers with the sole intent of out pricing the competing offers. Usually the highest offer will be accepted, causing an inflated price. 

Declining Market Values:
In a buyer's market, the prices are usually lower due to the higher amount of homes on the market at the time. When there are more homes than buyers, the sellers will often accept a lesser value in order to create a sale.

Economic Hardship:
An abundance of foreclosures combined with a lack of comparable sales in the neighborhood show drops in value beyond a soft market.

An incorrect evaluation by the underwriter.

Over Pricing:
Some FSBO sellers simply ask too much for their home.

Appraiser Experience:
An inexperienced appraiser may sometimes miss or underestimate some influences on value, therefore creating a lower appraisal.

Appraiser Errors:
Missed data, such as pending sales, which may be reflecting a higher comparable sale price.

Using comparable sales from the wrong neighborhoods. Not all neighborhoods reflect the same value.

Cash Back Sales:
Buyer receives cash back from the seller, leading the lender to believe the price has been inflated.

These are the most common reasons for low appraisals. Although there can be others, this section should give you a good idea about why a low appraisal can happen.


Lower the Price:
The buyer may persuade the seller to lower the price of the home to reflect the appraisal value in order to proceed with the sale. Assuming the appraisal is accurate, the bank will not lend a buyer more than the home is actually worth. Lowering an over-inflated price is often the best solution.

Readdress What Is Included:
Many pending sales have appliances and other unattached goods included in a sale. Some or all of these items could be renegotiated to reduce the price.

Pay The Difference:
The buyer can pay the difference between what the offer is and what the bank will lend. If the buyer really wants the home and is capable of paying the difference in case, this is often an easy solution.

Challenge the Appraisal:
Some appraisals have errors. Comparables outside of the affected neighborhood can show lower values than the home in question.

Time factors may also be addressed. The appraiser may have used homes that sold 6 months ago, but did not include current pending sales that reflect the current market trends.
Supply a list of comparables of your own that show a greater value than what the appraiser has submitted.

Order A Second Appraisal:
Ask your lender for a list of approved appraisers. Each lender has their own list of appraisers they will accept.

Either the buyer or the seller or both may pay for the second appraisal. Sometimes the second appraisal can be more expensive than the first, especially if there were errors or inaccuracies in the report. The experience of the appraiser can also be a major factor in the price.

The Seller Can Carry:
If the buyer really wants the home, but cannot come up with the difference in cash, the seller can offer to carry a second mortgage on the amount of the difference required to close the sale.

Making payments or a lump some payment at a later date (in the form of a mortgage) to the seller is another option. Always have a lawyer or notary view this type of arrangement to eliminate any confusion or errors in this type of contract.

The Buyer Can Cancel The Sale:
Assuming the appraisal is accurate, that indicates the home may have an inflated price tag. The lender will not lend more than the home is worth and the buyer does not have excess funds to pay the difference. 

Sometimes it is just best to walk away. Perhaps the appraiser did you a favor by saving you from buying a home for more than it is worth.