5 Reasons Why Your Property Appraisal Came in Low 

 

It can be a real disappointment finding out that the home you want to buy or where trying to sell appraised low. Unless you're planning to pay cash, a low appraisal can be a severe hindrance to acquiring bank financing that can shatter your dream of buying a house you wanted.

Lenders will only provide you with enough money for the home purchase up to a certain percentage of the appraised value. In this case, a low appraisal can mean that you have to raise more money on your own to come up with the difference.

Given the impact a low appraisal can have on a home purchase, it's important to know the potential factors that can lead to a low appraisal of a property.

Fast or Slow Market Pace

One factor that can play a role in a low appraisal is a market where there is a sudden increase in prices. When homes are selling rapidly in your area it can difficult for an appraiser to keep up with the market updates, especially if they are not familiar with that local market.  

An appraiser will look for comps that were sold recently to appraise the property that you want to buy. In the case of a fast-moving market, the appraiser may miss very recent sales that may not be readily available for comparison, missing new higher sales figures for local comps.

For instance, an appraiser may look into sales three or six months ago, not knowing that there are sales to compare days or weeks ago, resulting in a lower appraisal that misses a recent sales trend.

A slow market may also present problems when trying to finding good comparable properties. A slow market can also be a factor that can lead to a low appraisal. Slow turnover, inventory buildup, and fewer buyers can lead to a lack of comps. In this case, it will be difficult for an appraiser to appraise the market value of a property right. 

Functional Obsolescence

Appraisal experts and real estate agents are more familiar with this term than ordinary people. So, if you're someone who hasn't heard about functional obsolescence before, it's crucial that you know about it, especially when you're buying a home. 

Functional obsolescence refers to impractical or undesirable features of the subject property that negatively affect its appraisal value. The following are a few examples:

•    A decent-sized home with only one bedroom. 

•    A home with a master bedroom that you can access by walking through a dining room. 

•    A bedroom that you can access by walking through another bedroom. 

•    A home that has a formal living space that you can only enter from the garage. 

The features mentioned are not so desirable, especially to appraisers. So you can expect that the appraiser will give a low appraisal because of the said issues of the property. 

Ugly Homes Next Door 

Although the property you want to purchase is the most delightful house on the block, it still may not raise the appraisal value if every other home on that block is a dump.

That's what real estate experts called appraisal regression theory, which means that the not-so-good homes in the area will drag down the appraisal value of the best property in the area. 

Home buyers nowadays consider the neighborhood as a worthy investment as the property itself. The appraiser will be considering the area the property is locating in as a factor in their appraisal. If the neighborhood is no good even if the subject property itself is the best in the area, the appraiser will likely give it a low appraisal grade than you expected. 

Emotional Purchase Can Sometimes Lead to Overpaying

Sometimes home buyers get excited and want the property so bad that they end up offering a higher price than what the home is worth. Also, bidding wars can erupt, resulting in a contract price that is much higher than what the property will appraise for. 

If you're going to buy a home, you should keep in mind that the lender will only finance you according to the appraised fair market value and not the price you expected of the property. If you offer a higher price than the appraised value, then you have to pay for the difference yourself. 

The Appraiser Lacks Knowledge and Experience

The appraisal may come in low because of incompetence or lack of experience of the appraiser. It may be that the appraiser doesn't have enough knowledge of the local market, or perhaps he/she uses unusually low comps resulting in the low appraised value of the property at hand. 

If you notice any problems with the appraiser or if you think that his/her appraisal is incorrect, you can request for another appraiser. However, you should remember that it's not all the time that a low appraisal is due to a lousy appraiser. 

Takeaway

Indeed, a low appraisal can be a cause of disappointment for many home buyers. That's why you should be aware of the factors that determine appraisal value when you are searching for the right property. Purchasing a property usually requires acquiring financing, which is largely influenced by the appraisal value of the said property. Having a good idea about whether or not a property will appraise can help guide your property search and avoid the hassle and disappointment of having a deal fall through.