All About Appraisals

What happens when you find your SWFL dream home and you apply for a mortgage but the appraisal comes in too low? We'll talk about this situation which is occurring in today's market, but first… 

What Is An Appraisal?

An appraisal is a professional assessment of a property’s current value based on the condition of the property and other comparable properties that have sold recently. When you apply for a mortgage, your lender will assign an appraiser to come out and access the property’s value. 

Appraisals help the lender protect their investment by ensuring the property is worth the amount you have agreed to pay. In the same way, the appraisal works to protect you from purchasing a property at a price that does not support the current market value. 

Why Would An Appraisal Be Low? 

In markets with low inventory and high buyer demand, home values usually rise. The high demand for property often sparks bidding wars that result in homes selling over the asking price. When it comes time for the appraisal, sometimes the historical property data cannot support the negotiated purchase price, causing the appraised value to be lower than your agreed price. 

Aside from bidding wars, there are other reasons the appraisal can come in low. For instance, maybe the appraiser is not familiar with the area and did not choose good comparable properties for the report. Maybe they missed a key feature that would have raised the value. Or maybe there are no good comparable home sales, and therefore, they erred on the conservative side when assessing the value.  

What Happens When The Appraisal Is Too Low?

When the appraisal comes in lower than the amount needed to support the loan, it creates what is known as an appraisal gap. Our first suggestion is always to review the appraisal report with a good eye. Did the appraiser miss something big? On the flip side, what did they document that you might not have considered?

You could chat with your lender about the option to have a second appraisal if you believe a mistake was made. You could also share the appraisal with the seller and attempt to renegotiate the purchase price. Lean on your Realtor's guidance and expertise during this process. 

You could also choose to come up with the extra funds in order to fill “the gap” if that is what you decide. Or, depending on the conditions of the contract you submitted, you might also have the chance to walk away from the deal if there was a financing contingency in place. 

The Bottom Line

Appraisal gaps are not fun to deal with, but an experienced real estate agent can point out potential appraisal issues before you even submit your offer to purchase a property. If you are planning on obtaining a mortgage, be sure to ask your agent about the best course of action to protect you during the buying process.