Most lenders require a full interior and exterior appraisal. Remember that an appraisal is not the same as a home inspection. What the appraiser is concerned with is determining the condition of the home and, therefore, its value. Here are some of the common culprits. In a sellers market, bidding wars often drive home sale prices higher than appraisals can support.
An appraiser fails to take upgrades, popular features or upscale amenities into account. Comps should be both recent and similar. They should also only be using sold homes, not homes that are currently on the market. If the house appraisal comes back lower than the purchase price, the buyer has a few options to keep the deal alive. The buyer can increase their down payment to make up the difference.
What the lender is concerned about is the ratio of the loan to the appraised value of the home, not necessarily the purchase price. 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. There are a few actions you can take, all before the appraisal. 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. Message and data rates apply. I agree to receive a one-time text message containing a link to download the Zillow 3D Home app at the mobile number I provide above, and I confirm that the mobile number is mine.
An iPhone 7 or newer is needed to use the app. Keep copies of the comps and give them to the appraiser when they arrive at the home. 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. Ask the buyer or their agent for the appraisal report if you believe there is misinformation in it.
If you already own it and are happy in it, you might not want to make any changes. On the other hand, if you are buying a home and the appraisal comes in low, it might mean that you are overpaying. This can be an excellent opportunity for you to have a conversation with a knowledgeable party that you trust that does not have a financial interest in the transaction to ensure that you are making the best choice. Steve Lander has been a writer since , with experience in the fields of financial services, real estate and technology.
By Steve Lander. Related Articles. The Appraisal Process Appraisers use different methods to determine a property's value. Appraisals and Purchases When you are looking to buy a property and the appraisal comes in below the purchase price, you will probably end up with a shortfall on your loan.
Insurance companies and appraisals of property where comparables are hard to find — such as rural properties or special-use properties — frequently is the replacement cost approach. Real estate investors buying property in rural areas can combine the replacement cost approach with the income approach to help determine the true market value of income-producing property.
There are three other ways real estate investors can determine property value. Appraisal reports can come in lower than the offer price. Appraisals lower than the offer price can occur when the market is neutral, lukewarm, or even red hot. Opportunistic seller or inexperienced buyer. Mistakes by the appraiser or lender. As an investor, you can still decide to buy the property even if the appraisal is lower than the purchase price. For example, you may believe the long-term true value of the property is greater than the appraisal due to factors such as a soon-to-be improving economy or strong future population growth.
Sellers have few options if the appraisal is lower than the offer price. How you respond as a seller depends on what part of the real estate cycle you are in. For example, in a hot market, appraisers often have a hard time keeping up with quickly increasing property values. Of course, the seller and buyer can also mutually agree to extend the contract appraisal contingency to allow time for a new appraisal.
No matter what side of the closing table you are sitting on, there are several things a buyer and seller can do to prevent a low home appraisal before it happens:. Having a real estate transaction fall through because the appraisal is lower than the offer price can be a waste of time and money for both the seller and the buyer. But the good news is, there are plenty of ways to proactively help prevent a property appraising for less than the contract price such as:.
If the appraisal still comes in low despite your best efforts, you can always try to renegotiate the deal.
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