Selling a home is a significant financial and emotional undertaking. After investing in your property, securing a buyer, and agreeing on a price, the transaction appears to be nearing a successful conclusion. However, a common obstacle can arise that disrupts this momentum: a low appraisal. When the appraised value comes in below the contract price, it can introduce considerable uncertainty and risk to the deal.
With over two decades of experience in the real estate industry, Ralph Harvey, Lead Broker and CEO of List With Freedom, details how he’s seen that a low appraisal is one of the most challenging issues a seller can encounter. Yet, it is important to understand that this is not an impossible problem. Ralph provides a clear, strategic framework for understanding the implications of a low appraisal and navigating the available options to keep your sale on track.
Your Top Appraisal Questions, Answered
Understanding the Difference: Appraisal vs. Home Inspection
In order to appropriately handle a low appraisal, it is necessary to differentiate it from a home inspection because they are aimed at serving different objectives. The home inspection is carried out for the benefit of the buyer. A home inspection involves a qualified home inspector who examines the condition of the property’s major components. These include the electrical system, heating system, air conditioning system, water heater, the plumbing system, roof and the structure. The aim is to detect any defects or safety hazards, thus giving the buyer a complete picture of the condition of the premises along with any prospective repair needs. To learn more about home inspections, read our recent blog on a seller’s guide to understanding home inspections.
A property inspection is generally done to protect the lender. A licensed appraiser is required by law to establish a property’s fair market value. The value of the property is determined by comparing its details with those of similar homes that have sold recently. These are called ‘comparables’ or ‘comps’. The comparables are homes of similar size, in a similar area and of similar quality to the property being valued. This property valuation is used by the lender to ensure that the property is sufficient collateral for the amount of the loan.
Overall, an inspector looks at a house and provides a report on what is wrong with it while an appraiser will determine how much it is worth.
Common Red Flags That Lower Appraisal Values
A valuer’s assessment is based on a detailed examination of a range of elements. Many sellers are unaware that there are certain items that can actually decrease the value of their property when potential buyers order an appraisal. Poor maintenance of a house can be identified by an appraiser through a number of visible signs. A house that looks unkempt, such as one with cracked tiles, leaky taps and peeling paint, may have a reduced price due to the impression that it suggests problems that are either expensive to fix or are currently hidden.
Homes with items nearing or past their functional lifespan in key areas can decrease the appraised value. The property features aging building systems including outdated heating, ventilation and air conditioning systems, electrical panels and plumbing, as well as kitchen and bathrooms that have not been renovated for decades. The condition of these features has a significant impact on the purchase price.
An appraiser will typically view any indication of structural or safety issues as a major concern. The inspection involves searching for signs such as a cracked building foundation, signs of past water damage, a roof which has reached the end of its serviceable life or evidence of the presence of hazardous materials. The structural integrity of a house can be significantly impaired by termite damage and by pest infestation in general. This can result in a decrease in the property’s value.
What to Do When the Appraisal Comes in Low
Receiving news of a low appraisal requires a calm and strategic response. A few choices are open to the seller in this instance.
- The first option is requesting to review an assessment of worth. It is in sellers’ interests to dispute the surveyor’s report but one must enter into this process with a clear head. In most cases appraisals cannot be overturned – this occurs in about one to two percent of cases. It may delay the sale by up to two weeks. A challenge to an appraisal can only be successful when evidence of errors within the appraiser’s report is provided. The appraisal may indicate incorrect details, including square footage, and may fail to identify bedrooms or bathrooms. Alternatively, it could incorporate comparable properties that support the sale price. In this situation, this method can be used but it should not be your first option for a solution.
- If the sales contract can’t be agreed upon, another common approach is to negotiate the terms of the contract with the buyer. In many cases the most effective way to rectify a valuation shortfall is through negotiation. The difference between the sale price stipulated in a contract and the value assigned by an appraiser is called the “appraisal gap.” Often, the difference between offers can be bridged by fair negotiations and usually it does not exceed $10,000 to $15,000. The common outcomes of an appraisal discrepancy involve either the seller reducing the purchase price to match the figure on the appraisal, the buyer negotiating with the seller to cover the difference with extra cash at closing or a combination of both. It is usually a question of how much you are prepared to compromise in order to keep the deal alive. While a divorce is emotionally and financially demanding, keeping a clear head can be the key to a divorce resolution.
The VA Tidewater Initiative
For transactions involving a buyer with a VA loan, a unique and advantageous process known as the Tidewater Initiative may be invoked. If a VA appraiser anticipates that the home’s value may not support the contract price, they can pause the appraisal process and declare a Tidewater situation. This action provides a short window, typically 48 hours, for the buyer’s and seller’s agents to submit additional data and comparable sales to justify the price. The appraiser reviews this information before issuing a final value. This proactive approach is a significant advantage compared to the reactive appeal process of conventional loans. In my opinion, this is the fairest way to handle appraisal concerns, and I believe all appraisals should follow a similar model.
How to Prepare for a Successful Appraisal
The most effective strategy is to prepare for the appraisal in advance to mitigate the risk of a low valuation. Providing organized and relevant documentation can help the valuer during the appraisal process. Prepare a packet that includes a detailed list of recent upgrades and improvements, including dates and costs.
Include a list of relevant comparable sales that you believe support the home’s value, as well as any pertinent documentation, such as a plot survey or information about HOA amenities. You should not ask the appraiser what they think the value is or attempt to unduly influence their work, but providing factual information is both appropriate and helpful.
Ensure the home is clean, decluttered, and accessible. A well-presented property allows the appraiser to conduct a thorough evaluation and reinforces the impression of a well-maintained home. Pay attention to curb appeal, as the appraiser’s evaluation begins the moment they arrive. It is important to understand that appraisers operate under strict ethical guidelines and are required to remain neutral. They may not engage in lengthy conversations, and this is by design. The rules and laws governing appraisals are stringent, and most appraisers take their professional responsibilities seriously.
Moving Forward with Confidence
In real estate transactions, a low valuation is frequently an obstacle encountered. However, low appraisals do not necessarily mean a barrier to sales. Effective navigation of the home buying process requires a clear head, a thorough review of the market and a careful assessment of your requirements. A professional approach will allow you to overcome this issue and keep your transaction on track for a successful conclusion.
At List with Freedom, we will help navigate you through every step of the home selling process.
Having an experienced team on your side can make all the difference, from preparing for the appraisal to negotiating the final terms of the sale. At List with Freedom, we provide expert guidance and a flat-fee MLS listing service that helps you sell your home with confidence while saving money.
If you’re ready to take the next step, learn how List With Freedom works and begin the process of listing your home!
Transcript
Top five deal breakers in a real estate transaction. Reason number three: appraisals. This is the one that is the most problematic in my mind. Everything else we can pretty easily solve. When you get to appraisals, typically the appraisal comes in and we get told after the appraisal is done that the appraisal came in low. Now everyone is scrambling around asking, “What are we going to do? What are we going to do?”
The Appeal Process and Its Limitations
Lots of people out there try to appeal the appraisals, and it does get done. People do appeal the appraisals, and on occasion—1% or so, maybe 2% on a good day—you get those appraisals to overturn them or reevaluate them and come up with different numbers. Not very often does that get done. There’s a very slim chance that that’s going to happen if you’re going to try to do that. There is a time consumption in this process. Usually you’re looking at 5 to 10 days, maybe as long as 15 days in some cases. In those cases, all parties involved—buyer’s side, seller side—will be asked to come up with comps.
You submit those comps and explain why and what you think is different about it. Maybe you’ve got some upgrades in your property or something unique about your property that might stand out more. You try to submit those and see what you get done. The success rate on that is very, very small. I don’t encourage people to do that. I encourage people to try to find other solutions to the issues and concerns there.
Negotiating the Appraisal Gap
Ordinarily, when they come in, they’re not missing the mark by a lot of money relative to the value of the property—five, ten thousand, fifteen thousand, maybe. So sometimes that can be buttoned up with just some negotiations between people. Sometimes the buyer will pay it all or pay part of it, and sometimes the seller will drop a little bit of it on there. There are some things that you can do in there to try to work it out. It’s not terribly complicated, but it does get a little emotional in this particular aspect of things. So please just remember it’s just a house, and you know, it’s not the most important thing in the world. I understand it’s your house, it’s your money. But at the end of the day, it is still just a house. So just kind of keep that in mind when you’re doing this.
The VA Tidewater Process
One place that you might see where an appraisal comes in that’s going to be low, or they think it’s going to be low, is in a VA appraisal. To me, this is the fairest way to do it, and I wish all appraisals were done the same way. But if you happen to be a VA buyer, or if you’re selling to somebody who’s getting a VA loan, and the appraiser comes out and the appraiser is going to appraise the house, after they’ve done their initial work, if they think it’s going to come in low, they enter into what’s called Tidewater. So the appraisal will just declare a Tidewater situation. They will give a short period of time to both the buyer and seller side to submit comps. You don’t know what it is. You don’t know if they’re off by $1 or $50,000 or any number. You just don’t know. All they’re telling you is they can’t get to the value of the contract. That’s what they’re telling you.
So you’re submitting your comps and things that you have that maybe you want to point out about the house that creates value, that maybe the appraiser might have missed or didn’t think of or give proper value to. Maybe they thought it was an older kitchen remodel or something like that, when it’s only one or two years old or something. So you can send those into the appraiser side. They’ll evaluate that stuff and they’ll come out with a final number. That is the final number. It may hit the mark at that point. It may be short, but that’s going to be your final number. To me, that’s a very fair way of doing it, as opposed to telling people on the other side where you’re $10,000 or $15,000 off, and now everybody’s trying to scramble to make up this little bit of money in a transaction, which is harder in my mind.
How to Prepare When the Appraiser Visits
So that’s one of the things that you can do there with it to help out with the Tidewater situation. The other one: when the appraiser is coming out to your house to appraise the house, you can be prepared. You can influence the appraiser. You shouldn’t ask them to do things. You shouldn’t ask what they think the value of it is, whatever the case is. But you can give them comps. So you can have comps for houses sold in the neighborhood. You can hand that to the appraiser. You can hand the appraiser a list of things that you’ve done to the house to improve it—the appliances, new roof, new tile, paint job, landscaping, whatever the case is. You can give a list of things that you’ve done to the house to increase the value, increase the curb appeal, etc. And if you want, you can put prices next to them: put new landscaping in for $5,000, put new floors in for $10,000, new kitchen for $20,000, whatever. Just give them a complete list of those things and let them then take those into consideration when they go to their final numbers.
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