When a homeowner seeks to sell their home, having an accurate appraisal done on the property is crucial. The appraisal gives the homeowner and potential buyers insight into the true market value of the home. But appraisals can sometimes come in lower or higher than expected. So are appraisals usually low or high compared to a home’s eventual selling price?
Why Appraisals Matter
An appraisal is an unbiased, professional opinion of a home’s market value. Appraisals are typically required by mortgage lenders when financing the purchase of a home. The appraised value determines the amount the lender is willing to lend. If the appraisal is lower than the agreed upon sales price, the deal may fall through unless the buyer can make up the difference in cash.
Appraisals protect home buyers by ensuring they don’t overpay for a property. They also protect lenders by confirming their loans are adequately secured by the value of the home. Sellers can use appraisals to properly price their homes before listing. Accurate appraisals are in everyone’s best interest.
Appraisal Methods
There are three main methods real estate appraisers use to determine a home’s value:
- The sales comparison approach looks at recent sales of comparable homes in the same area.
- The cost approach calculates the current cost to rebuild the home.
- The income approach examines the property’s revenue generating potential.
The sales comparison method is most commonly used for single-family homes. The appraiser analyzes similar homes that have sold nearby within the past 6-12 months. Adjustments are made for differences like square footage, age, renovations, etc. This method assumes buyers will pay no more for a home than it would cost to purchase a comparable one.
Reasons Appraisals May Be Low
There are several reasons why a home appraisal could come in lower than the contract price:
- Overpricing – Many sellers initially overprice their homes either intentionally, hoping for an appraisal waiver, or unintentionally because they overestimate the value.
- Rising interest rates – As rates rise, buyers’ purchasing power decreases, resulting in lower sales prices and appraised values.
- Lack of comparable sales – If there are few similar homes that have recently sold near the subject property, the appraiser may need to use less ideal comps farther away.
- Poor condition – Homes in poor condition or in need of repairs will appraise for less than updated, move-in ready homes.
- Location factors – Properties next to busy roads or undesirable neighbors may appraise for less than similar homes in more ideal locations.
Additionally, some appraisers tend to be more conservative in their valuations. They may select lower sales comps and make fewer upward adjustments. This results in appraisals coming in slightly under market value.
Reasons Appraisals May Be High
On the other hand, there are also reasons why a home appraisal could come in higher than the listing price:
- Underpricing – Sellers may initially list their homes below market value hoping to start a bidding war. The appraisal validates the home is worth more.
- Rapid appreciation – In hot markets, home values can rise quickly. The appraisal may reflect more recent sales data versus when the home was listed.
- Desirable upgrades – Modern updates like granite countertops and finished basements add value appraisers account for.
- Prime location – Central locations near top amenities often appraise for more than rural or inferior areas.
- Strong buyer demand – High demand and low inventory also push appraised values up.
Some appraisers also tend to be more optimistic in their appraisals, selecting higher sales comps and making more upward adjustments. This results in appraised values exceeding list prices.
Recent Appraisal Trends
According to data from CoreLogic, a property analytics provider, home appraisals have been coming in strong over the past two years:
- In 2021, U.S. homes appraised for 100.7% of their contract price on average.
- Through May 2022, appraisals averaged 103.5% of the contracted price nationally.
- Appraisals exceeded contract prices in many western states like Utah, Idaho and Arizona.
However, rising mortgage rates have slowed home price growth in many markets during the second half of 2022. This may result in more appraisals coming in below contract prices moving forward.
Typical Appraisal Variances by Price Range
While appraisals largely depend on the market and individual home, there are some typical appraisal variance ranges:
| Home Price Range | Typical Appraisal Variance |
|---|---|
| Under $250,000 | 0% to 5% below contract price |
| $250,000 to $500,000 | 0% to 3% below contract price |
| Over $500,000 | 0% to 1% below contract price |
Less expensive homes tend to have a wider range of possible values. Luxury homes over $500,000 usually have sufficient comparable sales to appraise very close to the agreed price.
Overall, a variance of 0% to 3% below the contracted price falls within normal appraisal ranges for most homes. Significantly larger differences could indicate an abnormal deal, like an unrealistically high contract price.
How to Handle a Low Appraisal
If an appraisal does come in lower than expected, here are some options:
- Renegotiate – The buyer and seller may agree to lower the price to match the appraisal and continue with the deal.
- Appeal – The seller can provide additional comps and evidence to dispute the appraiser’s valuation.
- Bring more cash – The buyer covers the appraisal gap difference so the loan covers the appraised amount.
- Terminate – If no agreement can be reached, the deal falls through and the home is relisted.
Sellers should price their homes realistically from the start to avoid low appraisals altogether. Buyers may consider making their offers contingent on the appraisal to protect themselves.
Are Appraisals Usually Low or High?
In summary, appraisals may come in slightly below, equal to, or sometimes even above a home’s contract price. But significant differences are uncommon in today’s market.
Moderate appraisal variances of 0% to 3% below the asking price are considered typical and normal. Major discrepancies could indicate an unrealistic list price or changes in market conditions.
With housing demand cooling in many areas, low appraisals may become more common in the months ahead. But for now, appraisals remain largely favorable for sellers in most markets.