How Often Do Home Appraisals Come in Low? Here Are the Odds

When people buy or sell a home, they are often curious to know the odds that the home will appraise. Although the answer depends on the situation, including whether the home was priced correctly and how fast values are rising in their area, figures from the broader market do offer some general context. While how often home appraisals come in low can depend on market conditions, research by Fannie Mae shows that in a balanced market, around 8% of appraisals come in below the contract price.

Low appraisals are more likely in markets where bidding wars are more common, where prices are rising quickly, or when there are a lack of available comps, according to Fannie Mae.

If your home doesn’t appraise, such an event could delay your sale, cost you money, and even stop a deal in its tracks. According to a National Association of Realtors® July 2021 survey, appraisal issues accounted for 7% of delayed sales contracts in recent transactions.

The odds of your appraisal coming in low depends on many factors, including your market’s current conditions. Jolene Jacobs, a top real estate agent who sells homes 57% faster than her market average, shares that low appraisals are becoming less common in her market in Royal Oaks, Michigan: “There’s been a couple here and there . . . Appraisals are not necessarily an issue right now. But I will tell you, earlier in the year, there were issues.”

We’ll dig into some of the reasons why your appraisal could come in low with insight from five real estate experts. Here’s a sneak peak at what’s ahead:

• How market conditions may increase the odds of a low appraisal
• What other factors can lead to a low appraisal?
• Steps to challenge a low appraisal when appropriate
• Your options if you can’t challenge the appraisal
• When to negotiate an appraisal gap guarantee
• Key takeaways

How hot market conditions may increase the odds of a low appraisal

According to analytics and data service provider CoreLogic, 7% of homes sold in May 2020 had a contract price that was higher than their appraised value. In 2021, that figure ballooned to 20%, equating to one in five homes. The recent slowdown in the housing market, spurred by rising interest rates and high inflation, has helped to make low appraisals slightly less common going into 2023. Let’s explore a few factors that may lead to a low appraisal under these market conditions.

Bidding wars can push sale prices higher

In a seller’s market, buyers compete for a limited supply of houses, often engaging in bidding wars which drive sale prices up higher than other recent sales. Since appraisers base their valuation on comparable sales, they may struggle to justify a sale price that is higher than those of similar, recently sold homes.

Sales data lags in rapidly appreciating markets

In fast moving markets, lagging sales data can make it difficult for appraisers to capture current market demand. According to a National Association of Realtors® survey, it took a median of 30 days to close on a home in June 2022, when the housing market peaked. By the time the home closes and the appraiser can use the sale as a comparable sale to support a valuation, it’s been 30 days since the buyer and seller negotiated the price. In the meantime, more recent comparable homes may be sold for more.

You can see evidence of this phenomenon by analyzing the correlation between increasing sale prices and the percentage of low appraisals. In January 2020, when 7% of homes sold for higher than the appraised value, Freddie Mac’s House Price Index reported a 4.49% increase from the previous year. By May 2021, when 20% of homes sold above appraised value, home prices had jumped by 17.81%.

In the slower 2023 market, low appraisals have become much less common.

Data source: CoreLogic

When the market is appreciating quickly, appraisal gaps become more common.

What other factors can lead to a low appraisal?

Beyond market conditions, there are other reasons why an appraisal can come in lower than expected. Our industry experts outline some reasons why you might encounter a low value below.

There’s data discrepancy between the report and property

“If there were egregious errors that the appraiser had made,” you may have grounds to contest the report, says Jacobs. Jacobs stresses the importance of verifying that the appraiser gives proper credit to the characteristics of the home, such as the correct square footage, the number of bedrooms, and any updates.

Seller tip: Review the appraisal report with your agent to suss out any material inconsistencies.

Home upgrades didn’t add as much value as anticipated

Top Virginia Beach, Virginia agent Bethany White shares that in her 13 years of experience, appraisals often come in low when the upgrades the owner made didn’t add as much value as they had anticipated.

For instance, if you spent $100,000 putting in an upscale inground pool, that upgrade could help nudge the buyer toward making a higher offer. But if the appraiser decides that pool is only worth a $20,000 boost in the home’s value, it could result in a misalignment between the offer price and appraised value.

Curt Stinson, a Tucson area real estate agent with 27 years of experience, agrees, citing overpricing as the main reason for an appraisal coming in below the contract price.

“We’ve all heard the old cliché, ‘don’t over-improve for the neighborhood,’ and there’s some truth to that,” says Stinson. “Depending on the surrounding homes and comps, the appraiser will only give you so much, no matter how much you’ve invested in upgrades.”

Seller tip: Manage your pricing expectations by asking a local, experienced agent for their opinion of your home’s value early on in the selling process.

The appraiser was rushed

Rachel Massey, Chief Appraiser at Massey & Associates Valuation Services in Saline, Michigan, says a home’s value is sometimes deemed to be lower than the sale price due to a lack of adequate research. If an appraiser is crunched for time, they may fail to find the best comps to compare your home to.

Seller tip: Ask the lender for an appraisal review or reconsideration if you think the appraiser didn’t account for all of the features and characteristics that could support a higher valuation.

The appraiser doesn’t have local experience

If an appraisal comes in erroneously low, it could be due to an appraiser using poor comparable sales data or just not being competent in the market, notes Mason Spurgeon, certified general appraiser and owner of Spurgeon Appraisals.

“Some banks will engage appraisers who are from out of the area and don’t have access to the local sales data,” he says. “In that case, the appraiser is forced to use data that is fed to them from other sources, and may or may not be correct.”

Seller tip: During your appraisal appointment, have your agent provide the appraiser with a list of recently sold homes in your neighborhood that are similar to yours and support your contract price.

You overpriced your home

According to Spurgeon, it’s common for appraisals to come in low when both seller and buyer choose to work without a real estate agent. In these cases, the seller may have overpriced their home above market value, while the buyer doesn’t recognize the discrepancy. “If the buyer or seller employs a Realtor® or an appraiser in their transaction, the sale price and market value are typically in line,” Spurgeon says.

Seller tip: Reach out to a top real estate agent to assist with your home sale, or at least offer a broker price opinion of your home’s value.

Steps to challenge a low appraisal when appropriate

As the homeowner, you can’t directly challenge the appraisal report. Only the appraiser’s client, which is usually the lender, can ask the appraiser to make data corrections or consider additional information.

Follow these steps to overcome a low appraisal:

1. Review the appraisal for any inaccuracies and missing information.
2. Ensure that the appraiser has considered the best comparable sales to justify your home’s value.
3. Dispute the appraisal by submitting a written request to the buyer’s lender. You’ll need to provide objective data with your reconsideration request.
4. You also have the option to request that the lender order an appraisal review or a second appraisal. The lender isn’t obligated to comply, so the reasoning behind your request would need to be compelling.

Your options if you can’t challenge the appraisal

Say your appraisal challenge doesn’t pan out — does that mean the deal is dead? Not necessarily.

Stinson estimates that when an appraisal comes back low, he is able to find a solution and complete the transaction about 75% of the time. Here are a few ways you can move forward with the deal:

The buyer can make up the difference

If the buyer can’t live without your home, they can pay the difference between the appraised value and sale price out of pocket. Spurgeon has seen this happen in scenarios where the buyer really wants the property or the market is on a quick upward trend and is moving faster than the sales.

The seller can reduce the price

If you’re highly motivated to close the deal, you can opt to lower the contract price to meet the appraised value.

The buyer and seller can work together to close the gap

If both you and the buyer are motivated to make the deal happen, you may choose to split the difference between the sale price and the appraisal amount.

The parties can choose to walk away from the deal

If the buyer included an appraisal contingency in their offer, they can exit the deal with their earnest money intact if the appraisal comes in under the contract price. 

“Ultimately, I would recommend not giving up until you get a hard ‘no,’ but remember that an appraiser is not likely to change their value without new data or comparable sales,” Spurgeon says.

When to negotiate an appraisal gap guarantee

According to Jacobs, sellers in her area anticipate the possibility of a low appraisal value when considering offers. In a strong market, sellers look for an appraisal gap guarantee when evaluating offers. This addendum stipulates that the buyer pays the difference (up to a specified limit) between the appraised value and contract price if the value comes in low. With strong buyer demand and low home inventory, Jacobs routinely sees such clauses with offers.

Key takeaways

• A slower 2023 real estate market is making appraisal gaps less common than during the sellers’ market of 2020-2022.
• In strong markets where appraised values aren’t keeping up with contract prices, sellers look for appraisal gap guarantee clauses when considering offers.
• You can challenge a low appraisal with a written request, but you’ll need to justify your stance with data or documentation.
• If the appraisal comes under the contract value, another option is for the buyer to cover the difference or to reduce your price.

Header Image Source: (Pixabay / Pexels)