by Matt Hermes
on Friday, August 9th, 2019 at 12:24pm.
It can be quite upsetting to find out that an appraiser thinks the home you want to buy is not worth what you thought it was. And a low appraisal can be more than just upsetting – unless you are a cash buyer, a low appraisal can make it impossible for you to purchase your dream home.
Lenders will only give you enough money to buy a home at fair market value. If the appraisal comes in low, you may have to come up with the difference.
Having an appraisal come in low is of course just as upsetting to a seller. When something like a low appraisal comes from out of left field, it can leave everyone disturbed.
Considering what an impact a low appraisal can have on the home selling and home buying process, it is a good idea to educate yourself on what factors can lead to a low appraisal. In some circumstances, you may be able to take steps to improve the situation.
In others, you may just have to accept defeat. Either way, you will be better prepared to see a home’s value in the same way an appraiser does.
Sometimes the appraiser is just flat out wrong. Keep in mind appraisers are not infallible. They are just like the rest of us and make mistakes. For this reason, it’s a good idea to understand how to dispute a low appraisal when buying or selling a home. Real Estate agents are often put in a position where they need help a client to challenge a real estate appraisal.
The above reference provides excellent information on what to do if your appraisal comes in low.
Potential Factors Leading To A Low Appraisal
1. The house is a disaster area.
Appraisers are human just like everyone else and can be influenced by external factors. You would think that all appraisers are like bean counters looking at just the number or rooms, how many bedrooms there are, or the square footage of the property. That is not the case. An appraiser is going to look at the interior and exterior condition of the property as well. You can do your part by reading the reference here so you can prepare your home before the appraiser arrives. Don’t make it easy for the appraiser to provide a low real estate value!
If there are dirty dishes in the sink, clothes hanging around, an awful smell of urine from the cat, or any other number of unpleasant things, don’t assume it won’t affect the appraiser’s value judgment. Your home should be pristine on the day the appraiser arrives at your doorstep. Don’t let the appraiser mentally check a box that your home is in terrible shape!
2. Basements are calculated differently.
The home can have an incredible finished basement with all the right touches, but the appraiser will still have to calculate the value of the basement differently than square footage above ground. While a nice finished basement can substantially expand the square footage of a home, the value of the basement space will still only be worth a fraction of what similar space upstairs would be.
This is, in fact, one of the more common reasons why an appraisal comes in low. Valuing a basement can often be far more subject especially when there are extravagant features such as a home theater, custom bars like you would see in a restaurant, personal gyms and the list goes on. Quite often people pour hundreds of thousands of dollars into their basement. That certainly does not mean they will get all the money back when it comes time to sell. In many cases far from it.
The value will be much higher if the basement is a walk-out and has full-size windows. You’re more than likely going to be over improving if you have four concrete walls and dump a ton of money into below grade space.
3. The appraiser uses unusually low comps.
To calculate the value of a home, appraisers look at nearby homes that recently sold, known as comparable sales or comps. The comps the appraiser uses may have all the same features as the home in question, such as a similar size, number of bedrooms, number of bathrooms, etc. kind of, but a similar home can sell for lower than normal if there are underlying issues with it.
The home may have had issues with mold or asbestos, for instance. If the appraiser does not look closely at the comp, he or she could be making inaccurate comparisons that damage the appraisal value.
There really are an endless amount of reasons why something could sell lower than fair market value. Maybe the seller was transferred and needed an immediate sale? Maybe there was a death in the family, and the heirs just wanted to sell quickly.
You get the point – there are countless possibilities. The appraiser, however, might just look at the sale price and never consult with the real estate agent who was handling the sale.
4. Improvements are not always as valuable as you would expect.
Home improvements and additions must be of similar value to other homes in the area to be valued as you would expect. If every home in the neighborhood has a finished basement that cost $40,000, but the home you are looking at has a finished basement that cost $100,000, you will run into problems.
No matter how nice, the appraiser will not value the improvements significantly higher than the same improvements in the other homes in the area. One of the biggest misconceptions among homeowners is that there is a one for one return on home improvements. That is almost never the case. More often than not it takes years to get full cost or more from making improvements.
The #1 reason why appraisals come in low is probably the real estate marketing getting ahead of itself. If homes are selling rapidly and at increasing prices in your area, it may be difficult for the appraiser to keep up with them.
For example, in hot areas around the country where inventory is low, some homes hit the market and sell instantly. These homes typically have multiple offers. In areas where there are bidding wars, it is not uncommon at all to see prices tens of thousands or more over the asking price. Bidding wars can cause a major dilemma for an appraiser.
The appraiser looks at recent comps to price the home, but the latest sales may not be easily available to compare. You can request that the appraiser takes into account homes under contract that hasn’t closed yet, but he or she is not required to grant your request. Real Estate agents have the same dilemma when pricing a home for sale.
6. The buyer had no guidance on what to offer.
Every day there are thousands of properties that have price reductions. This means one thing – the home was not priced appropriately. The seller was overzealous, or the agent promised the moon giving an unrealistic value.
On occasion in states where dual agency exists, a buyer will go directly to the listing agent. They don’t have a buyer’s agent in their corner guiding them, and they end up significantly overpaying for the property. When purchasing a home, it always makes sense to have a buyer’s agent representing your best interests. Don’t be conned by dual agency.
7. The home is the best one in the area.
Like home improvements and additions, there can be difficulties getting the right price when the home you want is the very best in the area. No matter how perfect the home is, the fact that it is a step above all the others will not come into play as much as you would like.
The appraisal value will be dragged down somewhat by the other homes in the area. This is called the appraisal regression theory. As a real estate agent, this can be hard to explain to a seller.
For example, in Milford Massachusetts, one of the towns I cover, there are very few high-end sales. When someone is selling a luxury home in this town, it can be tough because there are so few buyers willing to commit. Today many buyers look at a house as an investment as much as a place to call home.
They don’t want to commit to spending at the top of the market because they know years down the road they may have a hard time getting their money back. When there are so few upper-end home sales, it is not only a problem for selling but appraising as well.
8. Functional Obsolescence.
Functional obsolescence is a term not many people are aware of with the exception of appraisers and some very educated real estate agents. Functional obsolescence is when there are features that are not practical or desirable that affect market value. Here are a few examples:
A decent size home that only has one bedroom.
Having to get into your master bedroom by walking through a dining room.
Walking through one bedroom to get to another.
Having to enter from the garage into a formal living space.
Obviously, these characteristics are not ideal. It is certainly feasible an appraiser could come in lower than expected on value because of these types of issues.
9. There are not enough homes in the area to compare to.
When there are few homes nearby to compare to, the appraiser has no choice but to look further to find similar homes to aid in the appraisal. Unfortunately, where the appraiser looks, may not be where you would like them to. For example, sometimes there just aren’t any or enough comps in one town, so the appraiser has to go outside the city or town.
Not long ago, I had to evaluate a high-end antique in Ashland Massachusetts. There were no similar comps in the town in the last six months or even going back a year. Given the circumstance, I had to go outside the town to find similar sales. What I did was use some sales in towns that were nearby that had the most similar real estate value scale as Ashland.
Whenever you have to go outside the community, it is far more difficult for an appraiser. It significantly increases the odds of an appraisal coming in low.
The comps the appraiser uses may be in an area that is not as pleasant or desirable as where your home is, which can negatively impact the appraisal value. You may need to point out the problem to the appraiser because good comps need to be as similar to your home as possible – including the quality of the location.
10. The home you are looking at has a great view.
A great view is worth something. There is a possibility that the comps the appraiser is using do not have as nice a view as your home, which could lead to a lower appraisal value. You can let the appraiser know about the view. Of course, there is also the possibility that the value you place on the view is not the same value the appraiser does.
Evaluating views and even just the setting is quite common when you are selling a waterfront property. These homes tend to be more scarce with fewer comps to come up with an accurate value.
11. The appraiser lacks skill and experience.
Some people are not very good at their jobs. Other people are new at their jobs and do not have the experience necessary to do the task as well as it could be done. You may find yourself in a situation where the appraiser you are working with falls into one category or the other.
The appraiser may be in the wrong profession, or he or she may have appraised very few homes. You can do some research to determine if there is a problem with the appraiser, and you can request a different appraiser if necessary.
Keep in mind, though, that most of the time a low appraisal is not due to a bad appraiser. Only request a different appraiser if you feel sure that the appraisal is grossly incorrect.
12. You are overpaying.
Buying a home is an emotional experience. Buyers can get caught up in finding their dream home and wind up offering more than they should – and more than the home is worth. As a home seller, you may have to come to grips with the fact the buyer is overpaying based on accurate comparable sales data. When this happens, you might have to bite the bullet and accept this fact.
There will be a few choices including having to drop your price. If you are lucky, the buyer may decide the want to participate and put more money down to satisfy the lender.
Nobody involved in a real estate transaction wants to get that dreaded call saying that the appraisal has come in low. When this happens the stress level of everyone involved skyrockets. In situations like these cooler heads prevail. Get together with your real estate agent and create a plan to deal with the situation.