If Your Appraisal Came in Low, Find out Why
Are your appraisals coming in low? Are your contracts too high?
Many times appraisers are blamed for killing deals because of a low appraisal. This situation can be looked at from two perspectives.
The perspective that many don’t consider is that it’s not the appraisal that is low but rather the contract is too high. How can this be you may ask?
There are many reasons for an overpriced listing and today I’m going to go over the ones that I see most often. I hope that this will be helpful to agents and sellers in pricing their listings to the market.
When this is done there will be less likelihood of there being big variations between the contract price and the appraisal.
Tops Reasons For a Low Appraisal
1) You based the list price on incorrect square footage – I have found that a lot of real estate agents base their list price using the price per square foot method. The premise of this approach is that you apply the price per square foot of comparable sales to the square footage of the subject property to arrive at your list price.
There are a couple of problems with this approach and both have to do with
inaccurate square footage. The problem that I am addressing here is the inaccuracies in the subject’s square footage.
If the subject’s square footage is smaller than you think when you apply the price per square foot to the incorrect amount the value is overstated and you end up pricing the home too high.
The best way to reduce the likelihood of this problem occurring is to make sure you have the most accurate square footage available. I have numerous square footage blog posts that may be helpful to you.
In addition, I recently published a post that compared the relationship between the source of square footage information and how long it took to sell a house and for how much it sold for. It may help you understand the importance of accurate square footage.
2) A CMA was not done – If a CMA was not done then the list price may not be based on what the market indicates. A CMA is similar to an appraisal in that it contains comparable sales that provide a range of value for the subject property.
If a CMA is not used then the value may be based on other non-market related criteria. These may include seller suggestions, cost estimates, and hearsay about other recently sold properties in the subject’s neighborhood.
Some sellers may have a strong personality that “suggests” how much they need to get out of their house. The only problem with this approach is that it may be unrealistic because it is based on the owner’s bias.
Another inaccurate method is to base your list price on hearsay in the neighborhood. If John, who lives down the street and recently moved, tells you he sold his house for a certain amount you need to verify it. Some people like to puff up the price to make themselves feel better but if you use this information without verifying it you may overprice your home.
3) Cost does not equal value – A list price that is based on the cost of updates and renovations is also not realistic because it does not take into consideration that many renovations do not contribute more to value than they cost. Cost versus value is an important concept to keep in mind because if you only look at the cost it can be misleading.
The more important concept to understand is that of contributory value. By looking at how much additional value you get for a certain feature you will be able to get a more accurate estimate of the value of your home.
This is the crux of the appraisal process. Appraisers must determine how much specific features add to value and then adjust for these differences between the subject and sales. After this is done the sales provide a range of value that is used to reconcile a final opinion of value.
Most people confuse the cost of an improvement with the value that the improvement adds. By keeping an open mind you can avoid overpricing which can result in selling your home quicker.
4) There were mistakes in the appraisal – Nobody is perfect and appraisers are no exception. It is possible that mistakes were made in the appraisal which can negatively affect the final opinion of value.
If this is the case there is a process you can use to address the inaccuracies. It is my professional opinion that there is a right way and a wrong way to go about fixing the mistake.
The wrong way would be to let your emotions get the best of you. Rather than being negative, it would be better to approach the situation in a logical and positive way.
Find out what process the bank has to submit a reconsideration of value. If the bank does not have a formal process then you can submit a short and concise list of the mistakes in the report along with any sales you may have that the appraiser did not use.
It is important to make your reconsideration of value short and concise with actionable items that the appraiser can address.
5) For Sale By Owner – There is nothing wrong with those who want to sell their home on their own. There will always be those who like to do things themselves and many are good at it.
The problem arises when the owner cannot be objective when pricing their home. We all love our homes and it is easy to let our emotions take over resulting in an overpriced home.
If you cannot do this then you must find someone that can objectively price the home and that knows how the selling process works. While real estate agents charge a commission it is well worth the second set of eyes in addition to the fact that homes sold through real estate agents typically sell for more.
If you cannot look at your home through the eyes of a buyer and objectively use market data to accurately price your home then the appraisal may be lower than the inflated contract.
6) The market’s just not that into your house – If your home needs repairs, has a funky floor plan, or is in a bad location, buyers may not be drawn to it. If you are not able to identify these flaws you may think you can sell your home for a higher price.
Pricing your home too high, in the beginning, can get you started off on the wrong foot. It may even result in the home finally selling for a lower amount than you could have gotten if you would have set a lower but reasonable price from the beginning.
By pricing the home too high in the beginning it may turn buyers off. They will be able to compare your home to other similar ones and see that it is overpriced.
This may result in it staying on the market for a longer than normal amount of time. By the time you decide to drop the price it may look as though something is wrong with your home.
This could stigmatize your home to potential buyers and result in a low price, which is the exact opposite of what you’re shooting for. Whether you sell the home on your own or through an agent make sure the list price is based on recent sales and listings and is realistic.
7) Multiple offers – This problem usually doesn’t happen when supply and demand are in balance, however, when you’re in a market like we have now it can occur.
When housing inventory is low and there are ready and willing buyers this can spur bidding wars. In order to secure a contract, buyers may offer more than the list price.
The problem with this situation is that over the top offers like this have nothing to do with market value but everything to do with emotions. When high offers are made on properties that were priced to the market it is a perfect recipe for a deal that falls apart.
While some would say that the appraisal came in low in a situation like this the truth is that the deal was dead from the start. For sellers, it’s not always a good idea to take the highest offer, especially if that offer is not based in reality.
If the list price was arrived at by using recent sales and active listings then you should know if the contract is too high. It is better to take a lower offer if you know there will be no problems with the appraisal.
Question
There are many reasons that an appraisal can come in lower than the contract price. If you are proactive in pricing the home correctly from the start you can avoid these common mistakes. Do you have any questions about accurately pricing a home? Leave a comment below or you can always call or email me. As always, thanks for reading.
Hello Tom,
In the last 5 years, we have sold 20 homes that we rehabbed. We only rehab in sought after neighborhoods in the greater Birmingham area. Our motto is “Pride of the Neighborhood,” so, it is our objective to turn our homes into the very best home money can buy in each neighborhood where our houses exist. Because of this fact our homes are highly sought after and sell within a few days, if not a few hours, after they hit the MLS. Naturally, when we do our CMA we compare our homes to homes that are in the same condition and quality, pricing them at what we feel is a fair and competitive sales price based on our experience in this market. The fact that literally all our clients and their real estate agents agree that our prices are fair for the value of our houses, leads us to believe we are exceptionally accurate at estimating the REAL value of our offerings. Nevertheless, in the last 5 years we have lost over $300,000.00 at appraisal or literally one third of our profit. Our latest offering in the Forest Lakes Community of Chelsea, was by far the largest most beautiful and spectacularly rehabbed home in the community by far. All of the other homes sold in the last year in that community went for between $129 to $141 per Sq. ft. So, we priced our home at 6k under $129 per Sq, ft. Every agent who showed the house agreed the price was very fair, the house sold in just a few days for full price which should have been a win-win for us and the buyer. But, no. The appraisal came in at $94 per sq. ft. and wiped out every penny of profit on a 8 month rehab. In fact, just to break even, we had to stick to our guns with the buyer on a price well above the appraisal. If this were an isolated incident, I could understand it, but it happens in over half of our rehabs. What makes it worse is the quality and value of our houses are such that after one of our houses sell the comps go up all over the surrounding area, and it is only one or two months later that the comps for our house goes up to the price we were asking for it, primarily because we take highly destressed and foreclosed properties and turn them into the best houses in the neighborhood. The reason is clear, we are the catalysts for the increase in value across neighborhood after neighborhood only we see non of the benefit in rising home prices because of the short sighted nature of the appraisal industry in our market when it comes to rising home prices. I have done my research and this is not happening in other rising/sellers markets across the country. Why, are appraisers here so reluctant to allow the natural rise in home prices a seller’s market produces, and equally so eager it seems to find any reason to devalue a property that bucks the tide of years of price suppression in many neighborhoods like Forest Lakes? No matter, because of the last appraisal, and many others before it, we can’t see ourselves lasting much longer as a company unless we resort to just “polishing the turd” like almost all of the other rehabbers in this market. Personally, it’s my opinion that appraisers here are the single biggest destroyers of home values in our market, and the largest reason why we lag so far behind the rest of the country in the natural real estate cycle created by this economy. Everyone, says we live in a real estate bubble here in Birmingham, the problem is that bubble is robbing all of us blind, and appraisers need to recognize their part in the problem and what they need to do to step into the 22 century.
I cannot speak about any of the appraisals you have had done because I do not know any of the details. Forgive me if I interpreted what you have described wrong but it sounds like you strive to make your rehabs the best in the neighborhood. Is it possible that they are over-improved for the neighborhood? Just a thought. Also, what I always encourage agents to do (or sellers-flippers) is to pass the CMA that you’ve done along to the appraiser for them to consider. I cannot guarantee that the appraiser will be able to use the comps because we do have to adhere to Fannie Mae and bank guidelines but at least they can look at them and see where you are coming from on your pricing and they may be able to use some of the comps. Also, price per square foot is not always the best way to price a home, especially if homes in the neighborhood are diverse in size and style. The only time price per square foot can be relied upon is when all the homes are very similar in size, style, and quality. Sometimes people get confused and think that appraisers like killing deals but to be honest it creates more headaches for us. The public also thinks that appraisers make the market but we do not. We interpret the market and measure buyer’s reactions to features or updates in a house. The appraisal is meant to measure the market value of a house and provide an educated and experienced opinion of value that reflects what the majority of buyers would pay for a house. We’ve all seen the outlier sales that are so much higher than everything else. Most of the time there are reasons for these homes selling for more than typical and this can be someone paying cash or contributing more to a downpayment. These would not really be considered as reflecting true market value. Something else I also recommend to investors is to get a subject to appraisal (ARV) to determine what the home could be sold for based on the renovations that will be done. If you consider the average cost of an appraisal at $400 and multiply that by the 20 homes you rehabbed that would be an investment of $8,000 compared to your loss of $300,000. I hope I provided some food for thought. As I said it is hard for me to make any kind of statements for situations that I do not know the details about but I hope you understand that appraisers do not suppress the market. That would take a larger concerted effort than most appraisers are capable of and appraisers could lose their license if they were found to be colluding to influence value. If I can assist you with anything please let me know.
I’m really not sure what I expected by stating my case on an appraiser’s blog, but let me set the record straight so that your readers don’t get the idea that your excuses are in any way anything more than just that. First, we are not just rehabbers, we are also real estate agents and soon to be brokers. Second, we have provided the CMAs we prepared to establish comps utilizing the BAR software available to all MLS subscribers to every appraiser before appraisal along with an exhaustive list of our property’s renovations. Third, the inference that we would even remotely suggest that there exists within the local appraisal community enough collective intelligence to collude in any meaningful way is laughable. Fourth, the idea that we would lose $300,000.00 without earning a proverbial Phd in proper and acceptable appraisal procedures is equally as absurd, we could write a dissertation on the abuse of “subject to” appraisal by the local appraisal community alone. We have attended every appraisal class, symposium, convention and online blog available in the Greater Birmingham area over the last 5 years. Fifth, the one and only area you have address with anything akin to verifiable accuracy is the very real conflict of interest created by the lenders and underwriters’ mandatory rules enacted for the very real purpose of cheating homeowners and real estate investors alike of their hard earned equity. The insult to injury is in the local appraisers overwhelming zeal at applying these appallingly bias rules in order to receive preferential treatment from said lenders and underwriters. Example, agents and brokers are told that appraisals are evenly distributed among appraisal mediators and then those mediators equally distribute appraisals among appraisers from each mediator’s appraiser list. Is this true? Hardly, the same 3 appraisers have showed up for every FHA loan we have sold, and all from the same mediator, one guy showed up to 3 straight FHA appraisals all on the same day. And, yes we had 3 appraisals on the same day. But, kudos on completely ignoring the fact that I stated our Forest Lakes property was by was by far the largest most beautiful and spectacularly rehabbed home in the community when you wrote, “price per square foot is not always the best way to price a home, especially if homes in the neighborhood are diverse in size and style. The only time price per square foot can be relied upon is when all the homes are very similar in size, style, and quality.” Gosh, we would have never thought of that, even though I clearly stated we priced the home $6,000 below the lowest Sq. ft. comps in the community in the last year. Because justifying the deference between $141 a sq. ft. for the last home sold in Forest Lakes and the inexcusable $94 a sq. ft. our far, far, far, far , far superior house was appraised at would have taken an honesty you quite clearly do not possess.
Read more https://birminghamappraisalblog.com/appraisal-tips/7-reasons-your-appraisal-came-in-low/#comment-322839
Read more https://birminghamappraisalblog.com/appraisal-tips/7-reasons-your-appraisal-came-in-low/#comment-322839y and that whether or not Sg Ft. is not the best way to evaluate
Mr. Parker, I am sorry to hear about the situation you have been through. My attempt at a response to your comment on my blog was only meant to try to explain some possible reasons for what you experienced given the limited information I had. I don’t know the appraiser or lender that you used and I do not know their business practices so I cannot comment on the reason they did what they did. I’m here to answer any general appraisal related questions that you or others might have but as I said it is difficult to come in the middle of a situation and try to explain the thought process of others so I won’t attempt to do that anymore. I wish you well in the future.
I would be remiss not to include the only solution that did have an effect on our most recent appraisals. After the Forest Lakes appraisal we filed a grievance with the lender and the National Realtor’s Association. In fact, the lender was so shocked by the appraisal that they endorsed our grievance and wrote a letter to the appraiser’s mediator. Even though the same appraiser showed up again to our recent FHA sale 2 weeks ago and then again this Monday to another one of our FHA sale appraisals, amazingly both appraisals came in above the sale price. Go figure.
Thanks Tom! That makes perfectly good sense.
You’re welcome and let me know anytime I can help you.
If you have a listing that is one level on a slab in a community (just an example), and have recent sales that are primarily two story or one and a half, is it better to go back with greater days to find one story homes? Is there a general rule of thumb you recommend an agent to use in preparing a CMA?
It would be ideal to have one level homes, however, if they are not available it would be acceptable to use the 1.5 or 2 story homes if they are not too different in square footage, features, or quality. I don’t think I would only use the 1.5 or 2 story homes. I would use some older one level homes or even go outside of the neighborhood to another competitive market area to find more recent one level homes. A competitive market area is one that a buyer would also look at if no homes were available in the subject neighborhood. It would also be in the same or similar school system and the house would be similar in age, style, quality condition.
Hi Tom, my client’s 4-year old custom home is under contract. We have an appraiser coming this week. We are confident about all comps supporting the contract price except for the neighbor’s house. It’s a new construction that was sold from one distressed builder to another. It finally sold to buyers last month for $100k less than what other new constructions sell for in the neighborhood. My client is very concerned that the neighbor’s house would pull down their appraisal value. It’s no doubt the appraiser will use it as a comp because they are very similar in age and sf and number of beds/baths. How can I explain to the appraiser that the neighbor’s house rotted away for two years while it exchanged hands between builders? In addition, my client’s house is Q2 in quality and the neighbor’s is Q3 at best. How can I let the appraiser know without crossing the line? Another new construction with similar Q2 qualities sold a block down but there are no pictures in MLS because the buyers ended up customizing many features of the house. How can I support my claim that it’s Q2 in quality and thus is a better comp for my client’s custom home? Thanks
Honestly, if there is only one low sale then it should not be given much weight at all. If there are other sales that support the value then that will help. The low sale is considered an outlier. I would provide the appraiser with the sales you used in your CMA to support your list price as well as the low sale but I would explain to them details of why it sold low. The appraiser could mention the sale in the appraisal but document why it was not given consideration. While doing this I would not discuss value, or make comments like “I need this value” or “you shouldn’t have any problems reaching the contract price”. Just provide the facts and I think that if all the sales but one supports the value then you should not have a problem. I wrote a post about why including even bad sales can be helpful in explaining the market. Here is a link to it:
https://birminghamappraisalblog.com/realtor-tips/why-agents-should-include-bad-sales-as-well-as-the-good-sales/
The dollar per square foot method is the most miss=handled thing agents do. Many homeowners and agents too don’t understand why. When I have had my agents hat on and I show the seller the statics, they see the range for the $psf. Of course they rationalize their home should be at the higher end. So the lesson begins. The $psf includes everything, location, lot size, condition, number of bed/bath rooms, square footage, etc. If two homes are exactly alike in every respect, except the square footage, then the smaller home should have a larger $psf. Further, the size of the home is the only thing that changed, so your only going to adjust the portion that is attributed to the size of the home only. This why the appraiser’s adjustment for differences in size is a fraction of the overall $psf, I’ve given this lesson many times or 35+ years as an appraiser. I don’t know how clear I made that, hard to do in a short blog
You explained it well, John. You are exactly right about owners thinking that they should use the higher price per square foot even though those sales are usually smaller. You have a unique perspective since you are an agent and an appraiser.
Your statement “the market just isn’t into your house” made me chuckle. I don’t know why. Haha. The market is quite aggressive right now, so accounting for market conditions adjustments is a pretty big factor in valuations right now. But I totally agree about all the other reasons. If appraisals are always coming in at contract or above, that’s not a good thing. It should be normative in real estate to see appraisals coming in at different levels and to negotiate. Bottom line.
Thanks, Ryan. I agree about the market being aggressive right now although ours is probably not as much as yours. With that being said I am seeing a lot of offers above list price. That is not that unusual given the supply and demand but it is something that agents should be aware of and make sure that the offer is not so aggressive that the home will not appraise. I think most good agents should have a pretty good idea if there is going to be some appraisal issues.
Agreed. I think agents pretty much know and expect it at times. There is such a thing as accepting an offer that is not realistic. Thus it goes to show the highest offer isn’t always the best or strongest offer. In my area price growth has been speeding up and having rates at 3% right now may make things wonky. Thus I know I need to be on my toes to be sure I’m giving reasonable adjustments for the market. The other day a Realtor friend called and asked what could be done about a low appraisal. I didn’t review the appraisal of course, but I did ask my friend if there were any adjustments to the comps from December. There weren’t. Hmm, could that be the X-factor? Maybe. Maybe not. Granted, I didn’t do the appraisal, so I’ll defer to the appraiser who did the report. But being a guy who follows the market really carefully it’s surprising maybe to not see any upward adjustment from the dull fall season to a very aggressive market today.
Great points, Ryan. I think the lag that occurs in an appreciating market is one of those things that frustrate agents and buyers an sellers. That is why it is very interesting to use the most recent sales and also to apply market adjustments when warranted.