Appraisals are an important part of the real estate transaction, especially when a mortgage is involved. Lenders will typically want to verify the current market value of a home before they agree to extend a specific loan amount, and they do this by having the home appraised by a professional appraiser.
But not all appraisals necessarily come out the way buyers and sellers expect them to. Sometimes they can come in short, leaving buyers scrambling to secure a mortgage and sellers wondering if the deal will go through.
So why do appraisals fall through? Here are a few reasons why.
1. The Market Suddenly Changed
Real estate markets never stay in the same place forever. They’re always changing, and sometimes they can fluctuate rather quickly. It’s possible that the market has changed from the time the home was sold to the time the appraisal was conducted.
Usually, this can happen when homes are selling quickly and prices are spiking rapidly. In a case like this, it can be tough for the appraiser to keep up with such rapid changes.
For instance, in areas where inventory is tight and demand is still hot, prices can skyrocket in a very short period of time. But if things start to fizzle and plateau just before an appraisal is done, it could affect whether or not the appraisal comes in lower than the price that was paid for the home.
2. The Features of the Home Are Not Practical
If there are characteristics of a home that are not exactly convenient or desirable, these can impact market value. For instance, a home that’s comparable to the size of others in the area but only has two bedrooms compared to the average of four would be considered an impractical or undesirable trait. Likewise, a home that requires people to have to walk through a bedroom to reach the living room would be impractical as well.
In cases like these, an appraiser would have a tougher time appraising the property and would likely value it under what it could have been valued at if such nuances didn’t exist.
3. Comparables Are Lacking
One of the most important things that appraisers have to go on when they appraise homes are comparables. Also known as “comps,” comparables are extremely helpful tools that appraisers use to establish a value for the subject property. Ideally, appraisers will be able to gather a few comps that are similar to the subject property and have sold in the recent past.
But what if there’s nothing to compare the subject property to? What if the home is so unique that there’s nothing in the nearby area to compare to? Issues like these can and do arise, which can make the job of an appraiser more difficult.
The comps that the appraiser ends up having to use might also not be as desirable as where the subject home is, which can have a negative effect on the appraisal value.
4. The Home Sold For More Than What’s it’s Worth
This situation is rather common as a result of a bidding war. Usually, buyers who are competing with one another will try to outbid each other in an effort to come out the winner. In the meantime, such activity drives up the price of the home, and the winning bidder often ends up paying more than what the home is actually worth according to current market conditions.
In this case, the value that the appraiser comes up with may be lower than the price that the buyer agreed to pay for the home. If that happens, the lender will likely not approve the loan amount, and the buyer will be left having to come up with more money to accommodate the lower loan amount.
5. The Appraiser Made a Mistake
Most appraisals are accurate, but that doesn’t mean that mistakes are never made. It’s possible that the appraiser used bad comps or didn’t calculate the square footage correctly. Maybe the appraiser didn’t take certain traits into consideration, or perhaps the appraiser is simply inexperienced or just not good at their job.
There are literally dozens of reasons why an appraiser’s results may not be accurate. Regardless, appraiser error could be a reason why an appraisal comes out flawed.
The Bottom Line
It’s never fun for either buyers or sellers to find out that the appraisal has come in lower than anticipated. Should that happen to you, find out why. Discuss your options with your real estate agent and come up with a plan to handle the situation as best as possible.