Lenders require an appraisal to confirm that the property is as valuable as you claim it to be; the confirmation helps lenders secure their investments. Unfortunately, an appraisal may return a value lower than the price of the home. Such a low appraisal means you may not get enough money to buy your target home. Below are some of the major causes of low appraisals.
Market Conditions
A bad market can give rise to a low appraisal even if nothing is wrong with your property. Here are the two types of markets most likely to trigger a low appraisal.
Hot Market
A hot market describes a situation where properties don’t stay in the market. Maybe buyers have found the area attractive because of recent infrastructure developments, gentrification is underway in the area, or big business has set foot in the area.
Whatever the reason for the hot market, it means frequent changes to property prices. By the time your appraisal figures come in, the market will have improved. You know you are in a hot market if properties attract multiple bids, trigger bidding wars, and don’t take long in the market.
Cold Market
A cold market is the opposite of a hot market; in this case, properties take too long in the market. Maybe a local business giant that was the main anchor of the neighborhood has closed shop. Or maybe anticipated gentrification has failed to take off.
When the market is cold, you only have old properties to compare to your property. By the time you appraise your home, the market conditions will have changed, and you won’t get an accurate figure.
Issues With Comps
Comparable sales (comps) are recent sales of homes in the same neighborhood as the home you wish to buy. Comps should be similar to the home in which you are interested in. Here are some issues with comps that can lead to low appraisals.
Bad Comps
Sometimes, someone sells a home in bad shape, and then the new buyer renovates the home to excellent status. You won’t get an accurate appraisal if you compare such a home to a similar one in the neighborhood.
Foreclosure Sales
A few foreclosure sales in an otherwise healthy market can ruin your appraisal. Foreclosures typically sell for lower sales than conventional home sales.
Distress Sales
In a distress sale, the property owner is highly motivated to get rid of their property. Maybe the seller had to meet a medical emergency or relocate to another state. A distress sale is a bad comp because it’s likely to sell at a low price.
Property Issues
Apart from market and comp issues, the condition of the property in which you are interested may also lead to a low appraisal. Here are two specific property conditions that may lead to low appraisals.
Over-Improvement
A property that is way better than others in the neighborhood is likely to attract a low appraisal. Maybe the current owner renovated and remodeled the home to the point of over-improvement. In such a case, a low appraisal is possible since the owner is unlikely to recoup their investment.
Dereliction
A derelict property, one that the owner has neglected and is in a sorry state, is also likely to return a low appraisal. A low appraisal is even more likely if other houses in the neighborhood are in good states.
Seller Issues
Lastly, you might think that the appraisal is low while, in the real sense, the owner is the one with a problem. Some sellers have extremely high expectations or don’t understand their property or the market.
A low appraisal can derail your home ownership dreams if you are not careful. Involve Charles L. Moles Real Estate LLC from the start of your home search to reduce the risk of a low appraisal. We can also help you handle a low appraisal so you don’t miss out on your dream home. Contact us today for all your property needs.
