Understanding Why an Appraisal May Come in Lower Than Expected During Property Purchase

When Mary Clayton mentioned that the house was overpriced, she was right. However, there are multiple factors that a lender evaluates during the mortgage application process. Lenders examine the house price, mortgage rate, and the availability and quality of community services, including roads, schools, fire services, police services, and the tax base. The structure of the building itself is a critical consideration. A well-built home generally has more value compared to a similar structure constructed from inferior materials.

In most cases, because the appraiser doesn't see the same value that others expected, the professional appraiser has the final say. The appraiser's job is to provide an accurate assessment of the property's value, which the lender uses to determine the loan amount.

The Role of the Lender and the Appraiser

Before purchasing a property, the lender will almost always select and hire an independent appraiser, not to protect the buyer but to protect the investor providing the money. The lender is more interested in ensuring that the property's value justifies the agreed-upon contract price. The lender typically provides a copy of the negotiated contract to the appraiser so the appraiser is aware of the expected justification.

If the appraiser initially comes in lower than expected, they will look for any valid comparable sales or factors that justify the asking price. If the appraiser cannot find a solid justification, they may submit the report at the lower-than-expected value. This can trigger a range of actions, such as the buyer providing a higher down payment, the seller accepting a lower price, or the financing falling through entirely.

Key Factors in Appraisal

Several factors can influence why an appraisal may come in lower than expected. These include: Market Conditions: Local real estate market trends can significantly impact property valuations. Fluctuations in the broader real estate market can lower appraised values. Property Condition: The actual condition of the property, including any needed repairs or upgrades, can impact its appraised value. Lenders and appraisers are keenly aware of these issues. Location: The specific location and its amenities play a crucial role. For example, a property in a well-maintained neighborhood with good access to schools and services will likely have a higher appraised value. Recent Sales: Recent sales in the area can provide important data for appraisers. However, if comparable sales are outdated or not reflective of current market conditions, they may not fully represent the property's value.

What Can Buyers Do to Manage Low Appraisal?

When faced with a low appraisal, buyers have several options to manage the situation:

Negotiate with the Seller: If the seller is flexible, they may be willing to lower the price to match the appraised value. This can help ensure that the mortgage amount is within the seller's expectations. Increase Down Payment: Another common solution is for the buyer to increase their down payment. This can help the lender approve the loan and secure the property purchase. Challenge the Appraisal: Buyers can formally dispute the appraiser's findings through their lender. Performing a second appraisal or hiring a different appraiser to review the property can sometimes provide a more favorable outcome.

Ultimately, the decision to accept the appraisal value or take alternative actions depends on the specific circumstances and negotiation strategies of both the buyer and seller.

Conclusion

Appraisals in real estate are crucial for ensuring that mortgage loans are accurate and that both buyers and sellers are aligned on the property's value. Understanding the reasons behind a low appraisal can help buyers prepare for the process and make informed decisions. Whether through negotiation, increasing the down payment, or challenging the appraisal, there are strategies available to manage the situation effectively.