In the world of property purchases, it's pretty standard for the sales price listed on the contract to be on par with the appraised value. This makes sense, as the agreed price usually mirrors the going rates in the current market.
Appraised value is a professional judgement of a property's worth, which may not correspond to its actual market value or selling price. Lenders rely on appraised values to underwrite mortgage terms such as computing loan-to-value (LTV).
Do sellers usually lower their asking price if the appraised value is lower? Whether the seller decides to lower their asking price will depend on a number of factors, including how motivated they are to sell or if they have other offers above asking price.
The appraiser's primary role is to determine the fair market value of the property based on objective factors such as its condition, location, comparable sales, and market trends. The appraised opinion of value may be the same or very close to the contract price however, it may also be considerably higher or lower.
Issues For The Buyer
You may try to negotiate a lower price with the seller, but if a compromise can't be reached – or you can't pay the difference to cover the appraisal gap – the sale could fall through.
Appraisal is lower than the offer: If the home appraises for less than the agreed-upon sale price, the lender won't approve the loan. In this situation, buyers and sellers need to come to a mutually beneficial solution that will hold the deal together — more on that later.
The lender makes a loan based on the loan-to-value ratio that was agreed to in the contract. Many contracts contain a loan contingency, so if the appraisal comes in low, the buyer cannot buy the property under the contract's terms and can then cancel the contract.
Lenders make loans based on the loan-to-value ratio. If a home appraisal is lower than the sale price, the lender will give the buyer less money or may deny the mortgage entirely. A home that appraises for higher than the purchase price is a benefit to buyers and their mortgage provider as it means instant equity.
The above issues might seem concerning but, according to Fannie Mae, “the vast majority of appraisals confirm contract price.” In fact, they come back low less than 10% of the time. So, chances are, you won't run into this issue.
While Zillow states that Zestimates are within 10% of the final sale price of on-market homes 95% of the time for most major markets, the error rate can be significantly higher for non-major markets and more remote locations.
Poorly maintained homes or foreclosures have been known to drag property values down significantly. Their negative impact on appearances and security concerns will be taken into account when assessing area desirability levels.
In 2020, 42% of properties were appraised for more than the sale price. This share was 42% in 2021, 46% in 2022 and 50% in 2023. The average percentage value of an over-appraised property in 2024 so far is 8.9%.
Can the seller back out if your appraisal is high? Realistically, the answer is “no.” For one, they accepted your offer and would be breaching the sales contract if they wanted to put the house back on the market to capture a higher price.
Do appraisers look in cabinets? No, appraisers typically don't look inside cabinets, but they do need to check the condition and functionality of the kitchen and other rooms. Any visible signs of damage or wear can affect the appraisal value.
Who Gets Copies of a Low Appraisal. The seller often does not generally get a copy of the appraisal, but they can request one.
Most appraisals come in at the right price. According to a report by Corporate Settlement Solutions (CSS), only about 8% of properties sold in the first half of 2024 sold for more than their appraised values.
A low appraisal could derail a home sale or refinance. If the appraisal comes in lower than the sales price, the home buyer won't be able to borrow enough money to cover the price of the home. They'll either have to pay the difference out of pocket or renegotiate with the seller to drop the sales price.
Appraisals generally take 1 to 2 weeks, but can take as long as 4 weeks in a busy real estate market. The biggest reason for appraisal delays is lack of appraiser availability. The number of available appraisers is declining 3% each year.
Yahoo Finance tip: Your purchase contract must include an appraisal contingency, which states you can back out if the appraised amount is too low. Otherwise, you will forfeit the earnest money you put into the deal if you walk.
In a seller's market, where sellers hold more negotiating power, they'll have little incentive to lower their price in response to a low appraisal. In all likelihood, the buyer will have to make up the difference in the purchase price and the loan amount the lender is willing to offer.
In most cases, it's still going to be the buyer. “The buyer is usually required to pay the appraisal fee upfront, and it is owed even if the lender does not move forward with a loan,” says Lee Dworshak, a real estate agent with Keller Williams LA Harbor Realty in Rancho Palos Verdes, CA.
MARKET CONDITIONS
When markets move faster than normal, appraisal values lag market prices. As mentioned, the appraisal process compares recent past sales. Backward looking data -- no matter how recent it is -- won't keep pace with present prices in high-velocity markets.
If the seller won't negotiate a lower price, you'll be on the hook to pay the difference unless you have an appraisal contingency in your contract.
Most appraisals will be accepted for 90 days and many for up to six months. Rapidly changing market conditions can reduce the time frame to as little as 30 days. Different loan types, i.e., FHA, VA, etc., have different validity periods.