There are a lot of curveballs that you can encounter when real estate investing. One of the biggest obstacles one could face is a low appraisal. While you might expect this to be an issue exclusive to sellers, it can actually have a rather large impact on buyers as well. In some circumstances, a low appraisal can be a blessing for a real estate investor. In other cases? An absolute dealbreaker. If your appraisal came in low, here’s everything you need to know.
What Is a Home Appraisal?
If you’re buying an investment property with a mortgage, a bank appraisal will almost always be needed. From the bank’s point of view, a mortgage is an investment, meaning that banks won’t usually provide loans that they deem inflated versus value.
In a majority of cases, financial institutions will agree to an investment property mortgage based on the value of their own home appraisal. This can leave some homebuyers and real estate investors in a problematic situation, since this may be lower than the asking price.
Related: What You Need to Know About Home Appraisal
What Hurts a Home Appraisal?
There are a number of factors that can influence this process and lead to a low appraisal.
Foremost, you have to consider the competition which exists in the real estate market. The number of buyers versus the number of sellers can have a huge impact on asking prices. If there are few sellers but many buyers, prices will naturally increase to create an equilibrium in the market. Since appraisals are based on real estate comps, however, the current competition in a particular market won’t be taken into account. Rather, historical sales will be more pertinent when determining the actual value of the real estate in a particular region. A low appraisal can, therefore, be an indicator of high competition in the housing market.
Related: Should I Buy Investment Property in a Buyer’s or Seller’s Market?
Although less common, a low appraisal may be attributable to the individual performing the appraisal. Since personal judgments may come into play, some errors can occasionally occur. Therefore, if you feel that the home appraisal is unfair, you have the right to file an appraisal dispute and request a new one. To do this, you’ll need to provide additional information that justifies a new real estate appraisal, such as data on real estate comps or additional information about the investment property itself.
What If the Appraisal Comes in Low for a Buyer?
A low appraisal can be a godsend in the circumstance of a bad real estate deal. A low house appraisal could be an indicator that you’ve found a lemon: an investment property that seems great, but won’t actually provide the value that you expected.
If you intended to use a fix and flip or buy and hold real estate investment strategy, a low appraisal could be a great indicator that this property won’t be profitable.
If the real estate market trends don’t indicate that there will be good appreciation, the high asking price might be unjustified. Your home appraisal could, therefore, be the perfect time to back out if you don’t have enough indication for a successful real estate investment.
Furthermore, a low appraisal can be a fantastic driver for negotiation when closing a real estate transaction. With the information from the home appraisal in hand, buyers have a strong case to make when asking for a price reduction. Oftentimes sellers may have inflated expectations about the value of their property, and a low home appraisal can be hugely useful in driving the conversation towards a more suitable price.
Related: 10 Best Real Estate Negotiation Tips for Buyers
When Is a Low Appraisal Bad for Buyers?
In the circumstance that a low appraisal is caused by high competition, there’s a good chance that the seller won’t budge on price. Since buyers are aplenty, the seller wouldn’t face a hard time in finding a new buyer. In the circumstance of real estate bidding wars, there probably won’t be much willingness to negotiate from the seller’s end — even if the appraisal came in lower than the purchase price. Simultaneously, financial institutions would very rarely be willing to issue a loan for a value higher than the home appraisal. This leaves buyers in a tricky situation.
The most common option is that you take the loan at the value of the appraisal, and pay the remainder of the asking price in cash. If you have the liquidity to make up this difference, this may be a feasible option for you when buying an investment property. For most buyers, though, this out-of-pocket expense can break an investment.
In order to calculate whether this is worthwhile, consider using an investment property calculator. The one offered by Mashvisor gives investors a host of powerful tools to crunch the right numbers. Most importantly, you can find out the return on investment which you can expect from the real estate property. If after accounting for the added cost, your ROI is still high, it may be worthwhile to pay the difference. If, however, the added cost skews your ROI negatively, this is a good indication that you should back out of the deal.
How to Fight a Low Appraisal and Win
In the case of a low appraisal, buyer options include: backing out, negotiating, paying the difference, or appealing. When appealing an appraisal, buyers need to make a compelling case. The most important pieces of information you can present are real estate comps.
To find real estate comps, consider using an advanced tool such as Mashvisor. This platform provides you with an incredible degree of valuable information about the recent sales in the area of your intended purchase. You’ll have the power to perform your own comparative market analysis and to collect all of the numbers you need. Compiling this right information could go a long way to getting an adjustment from your home appraiser.
Bottom Line
Low appraisals can have a lot of different consequences. If you’ve made an offer on a house that turns out to be overvalued, it’s a great opportunity to back out. Conversely, if you’re adamant about buying a particular investment property, you may face issues with getting the right mortgage. Whether you decide to pay the rest in cash or not, though, make sure you have the analytics to back up your decision.