As the housing market changes, sellers wonder, “Will my house appraise for the selling price?”
In recent years, we have observed homebuyers paying prices above the seller’s listing price and higher than appraised values. According to the housing data service CoreLogic, beginning in January 2020, 7% of home purchases had a contract price above the appraisal. That frequency increased to 19% by May of 2021.
However, on the other side of the scale, the frequency of an appraisal being higher than the purchase price sank from 69% in January 2020 to 52% just one year later.
The frequency of the appraised value matching the contract sales price remained relatively flat, moving from 24% to 29%.
But is the above-asking-price tide already turning?
Paul Grossmeier, CEO of Grossmeier Appraisal Service, LLC, in Mukwonago, Wisconsin, who has been appraising real estate for over 30 years, doesn’t think so, stating that, at least in Wisconsin, buyers are still bidding “above and beyond asking.”
Trends and changing market conditions
A 2022 NAR Home Buyers and Sellers Generational Trends survey confirms Grossmeier’s observations. It observes that 29% of buyers are still paying more than the asking price. And, in fact, sellers in key markets like Phoenix, Sacramento, and Denver decided to sell precisely because home prices are high, according to HomeLight’s Buyer and Seller Insights Report for 2022.
Nevertheless, predictions through the end of 2022 signal lower house prices due to additional inventory and higher mortgage rates, which should lessen the appraisal gap and the workload for the appraisers.
One factor in maintaining this trend is the shortage of homes, which raised the CoreLogic Home Price Index to 15% in May 2022.
With experts forecasting a leveling-off of home prices in 2022, that gap could start to shrink. Still, in a fast-moving seller’s market with continuing inventory shortages, a delay in comps that support a higher appraisal can be problematic for buyers eager to snatch up a sale before someone else bids higher and gets it.
In this post, we’ll point out the factors directly impacting your home appraisal and provide 10 expert tips to be more certain your house will appraise for its selling price. We’ll also offer some expert insights into what you can do if the appraised value of your home comes in under the selling price.
When does a home appraisal happen and why?
Whenever a buyer is financing the purchase of a home or refinancing a mortgage, an appraisal of the property is typically required in order to assure the lender that the loan-to-value (LTV) ratio meets their underwriting guidelines, according to the Appraisal Institute, the nation’s largest professional association of real estate appraisers.
Lenders want assurance that the buyer isn’t over-borrowing since the home serves as collateral for the mortgage. If the borrower defaults on the mortgage, the lender wants protection against lending more than it might be able to recover.
The appraisal process involves an impartial qualified appraiser who is licensed or certified. The appraiser collects information and data in order to determine the property’s value. Some of the factors under consideration include:
- Hazards, such as FEMA flood zones
- The neighborhood
- Size, age, and condition of the property
- Construction details (type of foundation, type of materials used)
- Improvements made to the property
- Features, such as swimming pools or an accessory dwelling unit (ADU)
FHA and VA loans have additional requirements an appraiser must evaluate, most of which relate to safety and soundness.
Appraisers then compare their findings with appraisal and market data, such as Fannie Mae’s Collateral Underwriter, and use a comparative market analysis (CMA), incorporating a pool of recently sold comparable properties (or “comps” for short) that mirror your house in size, square footage, number of beds and baths, and location, in order to determine your home’s current market value.
Grossmeier explains that appraisers use historical data to estimate present-day value. He often consults the Marshall & Swift Residential Cost Handbook, which provides historical cost indices for a wide variety of housing styles, the classifications for building quality, corresponding descriptions, and example photographs.
However, in the changing market, more recent data is favored over historical data. According to Holly Mitchell, a top agent who completes 11% more sales than the average Yarmouth, Maine, agent, Appraisal Management Companies (AMC) now want sales within the past 90 days instead of six months. “It’s all about time – what’s happening right now.”
To best reflect market conditions, Mitchell continues, most AMCs want to see the last three closed sales, but a maximum of 90 days helps eliminate seasonality impacting sales.
Are low appraisals common?
“You can’t always avoid [a low appraisal],” says Megan Walters, a top-rated agent who sells homes 40% faster than the average agent in her Columbia, Missouri, market.
Most appraisals come in at the right price. According to Fannie Mae, in general, appraisals come in below contract only about 8% of the time.
That average was skewed in May 2021, when about 20% of home appraisals came in lower than the sales price – perhaps as a result of the pandemic. Supporting that theory, CoreLogic provides documentation indicating that only 7% of homes sold in May 2020 had a contract price that was higher than their appraised value.
How much will your house appraise for and will it appraise for (at least) the purchase price? To get a good idea, start by checking its value with HomeLight’s Home Value Estimator. Two minutes and seven questions are all it takes to get a ballpark estimate of what your home might be worth right now.
What can cause my home to appraise low?
Many factors can result in a low appraisal. Some reasons that your home might not appraise as well as you’d like include:
Sluggish housing market, which results when values make a sharp downturn (a la 2008). Cold markets with excess inventory and few buyers result in a lack of good comps, making it difficult to get an accurate market value of your home.
Rising market, when turnover is too fast for comparable properties to keep pace. In this situation, “the market is moving too fast,” Walters explains. Low appraisals occur in markets where prices are rising, but appraised home values aren’t keeping up with how quickly homes are selling or the higher prices they command, resulting in lower appraised values that don’t reflect the industry change.
Low appraisals are common in a hot seller’s market because appraisals on comparable properties may have closed before the market changed. For example, the median number of days on market in June 2022 was just 14, according to a National Association of Realtors survey.
“With a shortage of inventory,” Grossmeier explains, “there’s not a lot of data to establish the rate of appreciation.” When basing an appraisal on the most current sales available, he says some appraisers may overshoot the value. However, they should make a “time adjustment” to account for lags in data.
Another lag in data can result because “towns and cities are back up on records,” Mitchell points out, or they’re awaiting tax declarations. Thus, sales aren’t getting recorded.
In addition to lagging sales data that can result in low appraisals, a limited supply of houses during a seller’s market, sometimes resulting in bidding wars, can drive up prices.
Appraisers who are new to the profession or lack local market knowledge. If an appraiser is new and lacks experience writing an appraisal on properties like yours, it could result in a low valuation. Similarly, if the appraiser is spread too thin covering a vast amount of territory, they may not know specifics about your local market that could boost your home’s value.
“An appraiser needs to know the local market,” Grossmeier insists. To pull a good comp, he says the appraiser should select recent sales in the “most similar municipal setting possible” because it would appeal to the same market segment.
There’s an appraiser shortage. When interest rates drop, more people want to purchase or refinance property. That adds significant workload for appraisers, who may struggle to keep up.
“The pipeline is only so big,” Grossmeier says, comparing the situation to CPAs during tax season. “If you need your taxes done every week, there aren’t enough.” However, he adds, there are enough appraisers to handle “normal volume.” Due to low interest rates and shrinking inventory, it hasn’t been a normal year for about three years. That has created a rush for both new home purchases and refinances. “It’s like during the pandemic when there weren’t enough nurses.”
Therefore, some appraisers turned to “drive-by appraisals,” or exterior-only appraisals, which can be less accurate than traditional appraisals. Similarly, to save time, some appraisers conduct “desktop appraisals” that don’t require a site visit at all, relying instead on public records and Google street view. The Federal Housing Finance Agency (FHFA) announced in October 2021 that banks and mortgage lenders can replace traditional appraisals with desktop appraisals for Fannie Mae- and Freddie Mac-backed mortgages.
During the height of the pandemic, some sellers didn’t want appraisers in their homes. Instead, Mitchell says, they sent time-stamped photos of their homes to appraisers, along with lists of improvements and costs to improve the accuracy of an appraisal.
Grossmeier still visits the properties he’s appraising. “There’s a difference between seeing a home of quality and seeing pictures of a home of quality.” He doesn’t like relying on other data sources and the terminology of the person who drives by: There are too many discrepancies.
Bad comps. Maybe there was a foreclosure in the area, or a flip. Perhaps a good comp wasn’t recorded when your home was being appraised.
No comps. Although Walters says not having comps can be a detriment to your appraisal, most appraisers manage to find something. The question is, how comparable is it?
You haven’t kept up with maintenance so the house is in poor condition. If you skip routine maintenance, your house could lose 10% of its value.
Your home was over-improved for the area. If your house has too many renovations, upgrades, or additions, you may not get a good return on your investment, especially if you haven’t been in the home very long. Excessive improvements may attract buyers, but don’t expect them to pay for all the work you’ve done on your home.
Price was set too high. “Price is key,” Walters insists. Some homeowners overprice their own house based on the “endowment effect,” an emotional bias that makes you value something more highly than its true worth.
10 expert tips to help avoid a low valuation
There are some things you can do to help ensure that your appraisal reflects the true value of your home. Be proactive.
1. Make a list of features and recent improvements you’ve made to the property
“A lot of times an appraiser will come and look at an air conditioner, and they’ll see the age on it, or will check the permits when they pull permits,” says Paul Fonseca, a top-selling agent in Fort Myers, Florida, with 27 years experience. “But it’s different when you tell them, ‘This was just put in, and it’s a Trane air conditioner, and it was $7,000.”
2. Provide maintenance records
Neglecting routine maintenance can negatively impact the sales price. Let the appraiser know you’re on top of things by providing before-and-after photos, receipts, and renovation paperwork to help the appraiser adjust values accordingly, says Santiago Valdez, a top-selling Chicago agent who’s sold 68% more properties than his peers.
3. Get a comparative market analysis
“It’s basically a free appraisal,” Walters says. For a comparative market analysis, real estate agents compile a list of sales of homes similar in age, size, and style, typically within a one-mile radius of your home. This document indicates averages and where your house fits in the range of sales prices. “It’s a good tool for pricing.”
4. Get a pre-listing appraisal
“Sellers can get an appraisal done before they put their house on the market,” Grossmeier explains. He says doing a pre-listing appraisal will give them an EPO (easy price option) indicating a value range using current data. This can be particularly important for unique properties that don’t have many comps, but for the average home with lots of comps, Walters advises her clients not to spend the extra money.
However, Madalyn Suits, who works with over 84% more single-family homes than the average Atlanta, Georgia, agent, says she only recommends a pre-listing appraisal on unique properties that are difficult to find comps for, or when she expects “a huge problem.”
5. Check that the appraiser is highly qualified
The buyer’s lender usually requests an independent appraisal through AMC, which selects the appraiser. However, you still want to make sure the person is a qualified appraiser with a designation from a recognized professional appraiser organization. The appraiser should be licensed or certified by the state.
In her Georgia market, Suits knows the strengths and weaknesses of different appraisers that serve the area. In multiple-offer situations, she sometimes advises sellers to choose a buyer based on the appraiser.
6. Provide a list of comps
Your agent will prepare a package of useful information for the appraiser, including a list of recent comps in your neighborhood. “The burden falls on the listing agent to provide comps,” Suits states.
Mitchell concurs. “Our job is to defend the price. The agent already has the comps.”
7. Provide a CMA or pre-listing appraisal
“Ninety percent of our work is research,” Grossmeier reveals. “Appraisers provide a realistic value supported by the market.” Why not make their job a little easier by sharing your documentation?
8. Make sure your home is clean and tidy
Officially, it has no bearing on the appraised value of your home, but it can make access easier and show off features better if it’s clean and orderly. Tamara Bourne, a top-selling agent in the Atlanta area who sells 84% more properties than her peers, focuses on paint, power-washing, curb appeal, decluttering, and depersonalizing.
Bourne believes these five areas of home preparation have played a vital role in her track record of successful appraisals. She emphasizes, “Our homes appraise — period.”
9. Learn how different loan requirements can impact an appraisal
FHA and VA loans have stricter requirements for the appraisal, as well as different underwriting guidelines. These might include requirements to upgrade outdated two-prong outlets, more attention to wood rot and earth-to-wood contact, and other detailed items, such as the need to replace single pull-chain light bulb sockets in a closet, crawlspace, or attic.
The different government agency appraisal requirements vary slightly. To see a comprehensive overview of the FHA loan requirements, HUD provides a 21-page handbook on appraisal guidelines.
10. Know your options for challenging a low appraisal
It can be difficult to challenge a low appraisal since “the seller won’t know the appraised value,” Walters points out. That’s because the lender hires the appraiser and is required by federal law to provide a copy of the appraisal report to the buyer, not the seller, according to the Consumer Financial Protection Bureau.
Sellers should have their agents go over it, Suits urges. The seller’s agent can request a copy of the report from the buyer’s agent. If there are inaccuracies, missed features, or incorrect information, the seller’s agent can then contact the lender to provide documentation proving the seller’s claims about the property.
Part of the challenge process can include requesting a reconsideration of value (ROV), which allows the seller or buyer to appeal to the lender challenging the property value determined by the appraiser. The ROV allows either party to point out what they consider errors in the appraisal report.
“The challenge is not to offend,” Mitchell believes. “There’s a protocol to refute [an appraisal].”
She says it’s rare for an appraiser to adjust the value. However, it’s possible to order an updated appraisal – particularly if new comps came in too late to be used in the original.
“The biggest thing,” Suits concludes, “is to be prepared with the numbers.”
Q&A: What else sellers should know about home appraisals
Does a house have to appraise for the selling price?
No, but it should appraise for the loan amount. The financed price is the maximum amount a lender will loan relative to the home’s value (loan-to-value ratio). For example, if the LTV is 80%, it would require a 20% down payment. In similar terms, Walters explains that if a house is priced at $200,000 but appraises for only $180,000, the buyer would have to cover the “appraisal gap” by paying an extra $20,000 out of pocket because the lender will typically only finance the appraised value.
Grossmeier has seen verbiage in contracts stipulating that the buyer agrees to pay $10,000 over the appraised value. It’s one way to protect a bid.
Similarly, Suits has seen buyers write clauses agreeing to pay $15,000 to $20,000 over if the house doesn’t appraise for asking.
Can a house sell for more than the appraisal?
Yes, especially in a seller’s market when inventory is low and competition is high, as long as the buyer is willing to bring cash to cover the appraisal gap, Walters notes. If the buyer can afford it, knowing that they’ll have to make up the LTV difference out of pocket and if they stay in the home long enough to gain sufficient equity (at least five years), it may make sense for a buyer to pay more than the house appraises.
However, Grossmeier says over-bidding is sometimes used as a delaying tactic to scare off other bidders and force the seller to renegotiate a lower price. In a hot market, he says it’s common to see bids anywhere from 64% to even 106% over ask.
Can the seller back out if the appraised value is too low?
Most of the time, the answer is “no.” Once the seller accepts a buyer’s offer, it’s a breach of contract to back out. However, some contingencies specified in the contract, such as new home contingency, appraisal contingencies, or home inspection contingencies, may offer an out.
Typically, by the time the appraisal is finished, Mitchell says both parties are “too far into the contract” to want to back out.
“If the house doesn’t appraise,” Suits concludes, “nobody wins.”
Do sellers usually lower their asking price if the appraised value is lower?
If an appraisal comes in low, a seller might lower the price to complete the sale. The appraisal is based on market research, Grossmeier elaborates. “The seller can lower the price to match market value.” If a seller isn’t willing to renegotiate, it can result in a broken sale. However, in a seller’s market, there may be other buyers waiting in the wings, so the seller may not be so interested in lowering the price.
As the market “normalizes,” Mitchell urges the parties to “meet in the middle” on price. “In a downward [market], it’s hard to lower the price, but when the market’s competitive, the sellers have a lot of equity and will still make money [if they lower the price].”
What should a seller ask a real estate agent to make sure the asking price will match the appraised value?
“Ask the agent where their comps come from,” Walters advises. “You want to be sure they’re not over-promising to get the listing.” A top agent should be transparent and set realistic expectations.
Bottom line: It all starts with the right listing price strategy
As Grossmeier says, “Most appraisers don’t care what the home’s value is; they just look at the data.” But a seller does care what the home’s value is and wants the appraisal to reflect that.
Many outside factors that impact an appraisal are beyond the homeowner’s control. However, making sure your home is in tip-top shape and that the appraiser has access to everything, including a list of recent upgrades, are a couple things the seller can manage.
Another thing in the seller’s control — which happens to be the most important factor in procuring an appraisal in line with the selling price — is to set the price accordingly. Walters maintains that, “Pricing it right is the best way to avoid a low appraisal.”
Mitchell thinks ensuring that sellers are part of the process results in realistic prices.
One of the best ways to make sure your home is priced right is to partner with a top real estate agent. A top-rated agent can provide a full comparative market analysis and will know your neighborhood.
HomeLight’s Agent Match platform can connect you with a top agent who knows your neighborhood. This free tool analyzes more than 27 million transactions and thousands of reviews to find an experienced agent who will help sell your home faster and for more money. HomeLight’s data indicates that the top 5% of real estate agents in the U.S. sell homes for as much as 10% higher than the average real estate agent.
To help you prepare for your appraisal, see our post, A Seller’s Home Appraisal Checklist: Cheat Sheet for Your Home’s Final Exam.
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