When the Appraisal Comes In Low

A low appraisal is one appraiser’s opinion on one day. It doesn’t automatically mean the contract price is wrong, and it doesn’t automatically end the deal. An appraisal has to cite multiple sales of comparable properties that give the lender confidence that the collateral (the house) is valuable enough to secure the mortgage. However, to attract an offer, a house merely needs to find one willing buyer.

What happens when an appraised value fails to meet the contract sales price depends on three things: the quality of the report, the loan type, and the terms of the contract. Here’s how to set yourself up for the best possible result, and how to challenge the appraisal if it falls short.

Before the appraiser arrives

No one can pressure an appraiser toward a number, but sharing facts is allowed. The goal is to make the appraiser’s job easier, not to bury them in paperwork.

What’s worth providing:

• Market data that isn’t available in the MLS, such as private sales
• Anything known about nearby homes that affects their value, like functional problems or condition issues the appraiser may not have seen, along with the contact information of someone involved in that sale who can verify it
• A copy of the survey
• A copy of the contract and any amendments or addenda

There’s no need to send an analysis of every comp. The appraiser isn’t required to use the information or call with questions. Oftentimes there are appraisal practices that mean the comparable sales you provide may not be a good fit. And many appraisers bristle at being provided data that is already in the MLS, as doing so can be seen as overstepping.

What the contract says

Neither the buyer nor the seller can be forced to renegotiate because of a low appraisal, unless the contract already says how it will be handled. Depending on the contract and the loan type, the buyer may have the right to walk away.

If the gap can’t be resolved, the usual options are to lower the price, have the buyer bring more cash to closing, reduce what the seller is contributing toward the buyer’s costs, or some mix of these. All of it is negotiable.

Read the report before you react to a low appraisal

The appraisal belongs to the buyer’s lender, and the buyer receives a copy. The seller usually sees it only if the buyer or their lender shares it. Once you have it, check the facts in the report before forming an opinion about the quality of the report.

• The home itself. Make sure the report describes the house as it actually is, including bedrooms, bathrooms, the lot, and features like a pool or covered porch.
• The comparable sales. Note whether each comp truly compares, including its location, lot, and what backs up to it.
• The adjustments. Make sure each adjustment is based on facts that are actually true about the home.

Why I challenged the report before the comps

I recently had an appraisal come in $15,000 below the contract price. Before the appraiser’s visit, I had provided the appraiser with context on the property and the market. He never reached out with questions, and the report came back low.

The usual reaction people have is to send back a list of better comps. I didn’t start there. Instead, I challenged the errors in the report itself:

• The lot. The home sat on a premium lot with a view of Corps of Engineers land. None of the comparables had that view, and some backed to busy roads. The report made no adjustment for the difference.
• The porch. The report took a $5,000 adjustment because the home supposedly had no covered porch. It actually had a large covered porch with a fireplace.

The difference matters. Choosing comparables is a matter of the appraiser’s judgment, and the appraiser can simply decline to change it. A factual error is different: a porch either exists or it doesn’t. By challenging only the errors, I never had to argue over which comparables were selected.

My background as a former state certified residential real estate appraiser helps me spot these problems quickly. Still, anyone can do a first pass using the checklist above.

Asking for a second look

If there are errors in the report, the buyer can ask the lender to have the appraiser take another look. This is called a reconsideration of value. It always goes through the lender, never directly to the appraiser, and the request should point to specific facts with proof attached. The goal is an accurate report, not to “hit” a particular number.

Plan for a short delay

Even when a reconsideration succeeds, expect closing to move by a few days. The corrected report has to be reviewed, and any change to the price or terms needs an amendment before the lender can issue the clear to close.

A low appraisal is frustrating, but it’s rarely the end of the conversation. It’s simply another point of negotiation. Start with the facts in the report, and the right next step usually becomes clear.

If I can help you with your real estate needs in the DFW market, reach out to me.

Sources

• TREC: New process for borrowers who want their appraisal values reconsidered
• TREC Form 49-1: Addendum Concerning Right to Terminate Due to Lender’s Appraisal
• Fannie Mae: Reconsideration of Value FAQs
• Texas REALTOR: Help clients use the appraisal addendum