Why Did My House Appraise For Less Than I Think It’s Worth, And What Can I Do About It?
Appraisals are an important aspect of real estate. After all, someone has to determine the worth of a property so it can be sold at a fair price. And lenders need to know they’re not overextending themselves on flimsy leverage – which, to them, means an inflated home price and higher loan amount.
The title of this piece suggests that it’s directed towards sellers, but if we’re being honest, both the buyer and the seller have a vested interest in the home’s appraised value being commensurate with the proposed offer. It’s easy to get stressed when the home you’re buying or selling is appraised for less than the offer, because it can potentially derail weeks or months of negotiations.
So what happens with an appraisal, and why is it important to not only both the buyer and seller but the lender as well?
A home appraisal is an unbiased estimate of the fair market value of what a home is worth. This is sometimes called its “true” value. This is important to lenders because they don’t want to take on the risk for an amount that’s more than the property is worth; that would severely undermine their leverage in the deal.
This is why it’s the lender who orders an appraisal during the mortgage loan process so that there is an objective way to assess the home’s market value. It helps them ensure the money they’re about to loan is appropriate. That’s not to say that a buyer and seller can’t order their own appraisals, but the lender’s appraisal is the one that, at least initially, the entire deal hinges upon.
The appraisal can include recent sales information for similar properties, the current condition of the property, and the location of the property, i.e., insight as to how the neighborhood impacts the property’s value. Appraisers are mostly looking at the condition of what’s permanently part of or attached to the house. They’re not evaluating the décor or furniture or anything that’s not affixed to the property; what are most important when it comes to determining a home’s value are its physical characteristics (such as its age, square footage, the number of bedrooms and baths, lot size, location, view) and their observable condition. The latter is important because it’s great that your house has gutters, but less so if they’re clogged.
If the home is appraised for less than its asking price or the seller’s offer, it can cause a whole host of problems. A lot of times, buyers walk away from their deals when the home they want to purchase doesn’t appraise for the sale price. In other cases a seller might end up lowering the home’s sale price to keep the deal alive. This is less likely, but sometimes the buyer ends up paying the sales price even though he’s taking a risk of making a bad decision. In this case, the buyer will usually have to pay the difference between the appraised value and sales value out of pocket. This isn’t always an option for most buyers, and in any case they’re likely to view the appraisal as a benchmark of the property’s actual value anyway.
If you’re a seller, your best defense is to get ahead of the game and get your home appraised prior to listing it. That way, you can factor that appraisal in to your pricing and you’re less likely to be surprised at a later one that appears to undervalue your home. Plus, you’ll have something to point to as a reason for requesting a second appraisal, and it’ll be stronger than the second appraisal alone.
But what if your own appraisal comes in at a lower value than expected? There are some things you can do as a seller to increase the value of your home. Remember that appraisers focus on the physical attributes of your home, their condition, and functionality. So clutter or a few dirty dishes won’t affect your value, but plaster cracks, water-stained walls, soiled carpeting, or persistent odors probably will. Put your best face forward and make any needed repairs that are obvious. Whatever you’ll spend in repairs is likely insignificant in comparison to the thousands of dollars that could get knocked off your home’s appraised if you don’t address those issues.
Keep in mind that appraisers often value houses in $500 increments, so if there’s an especially big repair, go ahead and do it. That’s an important aspect of appraisals that most sellers don’t realize, but it can help you itemize and prioritize your repair checklist. Speaking of itemizing, document your improvements! Keep a record of the repairs and updates you’ve made over the years – receipts, work orders, and invoices are best – especially things that might slip under an appraiser’s radar, like new insulation in the attic. Remember that improvements do not represent a dollar-for-dollar increase in value!
Curb appeal is still important because even though that doesn’t have a whole lot to do with the integrity or functionality of the home, it still says a lot about both. Get rid of overgrown foliage and make your home look inviting, because that first impression is important for an appraiser. If there have been recent changes to your neighborhood like new roads, or if you live in a particularly good school district, let the appraiser know.
If, after all of that, the lender’s appraisal comes in at a much lower value than expected, you can challenge it if you don’t think it’s accurate. You can also challenge it on grounds that it might not have taken all aspects of your home and/or location into consideration. Most lenders review appraisals through a system that compares appraisals of similar homes, and they can catch discrepancies if there are any.
This is also where the buyer and seller are on the same team in most cases. This is because a sale price has already been agreed upon, and the deal is contingent on the lender approving the amount of the loan based on their estimation of the property’s value. Buyers can ask their lenders for a second appraisal from a different appraiser who might be more familiar with local property values. Either the buyer or seller (or both) can also supply the appraiser with relevant value information such as recent similar home sales, which is separate from the process of challenging the initial appraisal. Remember that lenders are generally prohibited from discussing appraisals with home appraisers, but sellers and buyers are allowed to do so.
In other words, don’t panic if the appraised value comes in lower than expected. Whether you’re a buyer or a seller, you’ve got options and an under-appraisal isn’t the death knell for your transaction. As far as avoiding surprises, the seller can mitigate the risk of an under-appraisal from the get-go by appraising their home before listing and removing as many variables as possible, like making any necessary repairs.
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