In the arena of home valuation, the term “Low Appraisal” is perceived as a synonym for a “Bad Appraisal”. Yet these two terms are unrelated.
An appraisal with a value that is lower than what was anticipated by the home owner or one that is below a purchase contract price does not mean it is a “bad” appraisal.
Is your Home Overpriced?
Home owners often have preconceived notions of their home value based on unreliable data or sale prices of nearby houses without the expertise needed to adjust the sale price for property characteristics as they differ from their own home.
Realtors are frequently pressured to set prices for listings based on what their client, the home owner thinks the house is worth or what they hope it will sell for knowing they can reduce the price later if needed.
Please keep in mind that the home owner/seller and the realtor both have a financial interest in the value/sale price of the house. Whereas, the appraiser is paid a flat fee to provide an unbiased value without pressure, undue influence regarding the development, reporting or result of the appraisal.
A Bad Appraisal
For the sake of justification, here are just a few examples of a bad appraisal:
* Critical mistakes that are misleading
* Unacceptable appraisal practice
* The use of sales that weren’t the most similar to the subject
* Disregard of functional or external obsolescence
* Failure to address factors that affected safety or structural issues
“Low Appraisal”
There is no such thing as a “low appraisal.” It is a fictional term frequently used when the appraisal comes in lower than the purchase contract price. If an appraised value comes in lower than the sales price it likely means the property is overpriced.
Before you assume the appraisal is deficient and the appraiser has done a “bad” job when the value is less than the contract price, here are some facts to consider:
1) The appraiser is aware of the contract price and understands the consequences when the market value is lower than the contract price. The appraiser expects everyone involved to scrutinize the appraisal with a mission to discredit the appraisal report. Most appraisers will do everything in their power to complete a reliable appraisal while reconciling to a value that is at least as much as the contract price.
2) As a buyer, do you really want the house if it appraises below the price you agreed to pay for it? The appraisal is for your protection and that of your lender. Are you willing to come up with cash for the difference between the appraisal value and the contract price? Perhaps the appraisal could be used as grounds for renegotiation.
3) As a realtor to the buyer or seller, can you be the voice of reason? Can you recommend the best course of action to move forward without losing the buyer or losing this home that the buyer really likes? Maybe both parties can meet in the middle. The appraisal can be a great negotiating tool.
4) Don’t shoot the messenger… You may look at an appraisal and ask yourself “Why in the world would an appraiser use THAT sale as a comparable?” There are a lot of appraisal requirements put in place by the Uniform Standards of Professional Appraisal Practices (USPAP), Fannie Mae and Lenders (just to name a few) that an appraiser has to satisfy. For example, the appraiser has to use the most recent, most proximate comparable sales while bracketing the salient features of the subject including but not limited to location, view, age, quality condition, bedroom/bathroom count, GLA, etc. All of this is expected while using THREE comparable sales! Not only does the appraiser have to use the comparable sales he/she considers to be the best, often the appraiser is required to provide an explanation for sales he/she decided not to use.
Conclusion
A home purchase is the biggest purchase most people make in their lifetime and it can take up to 30 years to repay the debt. The appraisal requirement is in place to protect all involved parties by providing an unbiased, independent opinion of value to ensure the property provides adequate collateral for a loan. Maybe that low value is a blessing in disguise.
It helps to think about the fact that Professional Appraisers are the local value experts and analyze home values and markets all day long with years of experience. Also, know that appraisals have already been through a review process by another appraiser before it was finally sent to the home owner.
I hope you found this information useful. Consumer Home Value strives to be the unbiased trusted Real Estate Valuation resource for Homeowners, Buyers and Sellers. Leave us a comment or question or ideas on Home Valuation topics you’d like to hear more about. Join our email subscription list for more articles, blogs, podcasts and videos by Residential Appraisers nationwide.
