What to Do If Your Appraisal Comes in Low

Various market conditions can negatively affect the appraisal of a home you’re selling, making the appraised value lower than the sales price you agreed on with a buyer. In a seller’s market, appreciating home prices often make low appraisals a non-issue, but in a buyer’s market, falling prices can lead to your appraisal coming in lower than your agreed upon sales price.

This can be a problem because lenders will only lend on the appraised value. If your appraised value is lower than the agreed upon sales price, you’ll have to make up the difference in cash, or cancel the deal. There’s no reason to panic if your appraisal comes in lower than you expect it to, though. There are several steps you can take that may keep your deal from falling through. Read on to find out what options you have in the event of a low appraisal.

Causes of Low Appraisals

Low appraisals are frequently a result of a declining housing market. A lack of recently completed home sales gives appraisers little to compare a home to, making it difficult to determine the property’s true value. The addition of short sales and foreclosures to a market makes the appraiser’s job even more difficult by obscuring the true value of homes in the area. Prices can also be artificially inflated when there are multiple offers on a very desirable home. Or they can be inflated when sellers overprice.

And don’t forget appraiser error: an inexperienced appraiser may not entirely understand how to value your home. He or she may also overlook data that could significantly affect your appraisal. Or an appraiser from outside your area may not understand the dynamics of your location.

What to Do

A low appraisal means that the lender does not want to make the loan at the agreed-upon sales price. The lender makes a loan based on the loan-to-value ratio that was agreed to in the contract.  Many contracts contain a loan contingency, so if the appraisal comes in low, the buyer cannot buy the property under the contract’s terms and can then cancel the contract. One option is that a buyer can make up the difference in cash and take the loan for the lower amount.

Another option is that the seller can lower the price of the home. If the home was listed too high to begin with, this is a good solution. It takes a lot of time and trouble to sell the property again, so it’s worth seriously considering. Additionally, with FHA or Veterans Affairs transactions, a file number is assigned to the appraisal, which puts a permanent mark on the property that often makes it more difficult to sell.

You can also order a second appraisal, and if your loan is an FHA loan, ask the lender for a list of their approved appraisers. Either the buyer or the seller can pay for a second appraisal. Sometimes the second appraisal will come in higher than the first and eliminate the problem.

Last, the buyer can send a rebuttal letter to the lender. It must lay out solid, factual evidence about where the appraiser went wrong. A list of comparable sales (put together by the agents involved) should contain houses of similar styles and sizes. They should be located within approximately one mile and have closed in the last six months. This list can help justify your agreed-upon sales price. Make sure that the letter does not submit the same properties that were already used on the appraisal (which are listed on the appraisal report). It is important to note that this appeal is unlikely to be successful, however.

Ways to Protect Yourself Before Appraisal

The best real estate agents will give the buyer’s appraiser a list of comparable sales to analyze before the appraisal is done. You can prepare a package of information for the appraiser that includes any relevant documents, data on comparable houses, and any improvements that may increase the value of your home.

You can also get an appraisal before you list your home. Use the Appraisal Institute’s website to find a qualified appraiser in your area. This can help you set a realistic listing price for your home. Give a copy of this initial appraisal to the buyer’s appraiser—most will happily accept another perspective.