A home appraisal is an evaluation of a home’s market value based on comparable recent sales and sometimes recent listings in the neighborhood. Appraisals are required by a lender to protect both the lender and the buyer and to help to ensure that the buyer is not borrowing more than the home is worth.  

In hot housing markets, like the one we have been in for nearly a year, it can be challenging to accurately appraise the value of a home. Different appraisal values and below-offer appraisals can be confusing for home buyers and sellers and can sometimes prevent a successful transaction. 

Different Methods, Different Values 

An appraisal is typically conducted by a licensed real estate appraiser at the request of a lender or borrower. Appraisers generally use data on the prices of comparable homes sold in the last three or six months, or sometimes over a longer period. However, in fast-paced markets, where prices are rising rapidly, looking back at past home prices might not be a good indication of current values. It is important in this busy housing market that appraisers are not only using data on closed sales, but are also using data on pending sales and listings.  

Automated valuation models, or AVMs, have been a popular way for consumers to get an immediate assessment of their home’s value. These AVM values can also sometimes be used in refinance applications. AVMs collect data from multiple listings services, along with data from public records, to compare recent sales and list prices and generate a value for a particular home.  

There are differences in the methodologies in these AVMs, including the types of data used, how frequently the data are updated, and the number of comparables used in the estimate. These differences in data and methods can result in different home value estimates. (I plugged my home address into five different AVMs, and the difference in estimates was more than $100,000.) Because the housing market is so fast-moving, it is important that the data they use are updated very frequently. 

These public-facing AVMs are popular with consumers, but they can also provide misleading information and result in disappointed (or pleasantly surprised) homeowners when a licensed appraisal is produced. 

Appraisals Below Offer 

In this frenzied housing market, bidding wars and offers over list are common. When the home appraises at the contract price, the deal can go off without a hitch. However, appraisals below offer can throw up a roadblock to the purchase.  

While there are stories about buyers losing out due to a low appraisal, the data suggests that it is very uncommon for low appraisals to completely derail a transaction. According to Fannie Mae, an estimated 8% of appraisals came in below offer price in 2017. Zillow estimated that 10% of deals that fell through in 2018 did so because of a low appraisal. More recently, the National Association of REALTORS® reported in August 2020 that appraisal issues accounted for less than 1% of real estate transaction issues. 

Despite the fact that appraisal issues seem to be relatively uncommon, homebuyers that are worried about a home not appraising have increasingly been waiving appraisal contingencies in their offers. Nationally, Redfin estimated that about 20% of winning home offers last summer had waived the appraisal contingency. According to a survey of Virginia REALTORS®, in March 2021, 37% of REALTORS® said that it was very common for buyers to waive the appraisal contingency to make their offers more competitive. For some buyers, waiving the appraisal could be problematic down the road. For others, including those using an FHA or VA loan, an appraisal contingency is not an option.  

Helping Buyers and Sellers When Appraisals Come in Low 

There are several steps REALTORS® can recommend to buyers and sellers if an appraisal comes in lower than expected: 

  • REALTORS® should remind clients that AVMs are not meant to serve as a formal appraisal and that for most transactions, a lender will require an appraisal from a licensed real estate appraiser. 
  • Appraisals should include data not only on recent sales, but should also take into account homes that have recently gone under contract and homes currently listed for sale. The fast-paced market means that home prices six or even three months ago are not necessarily a good indicator of current home values. 
  • Buyers, sellers, and lenders can request a review of the appraisal to see if there were any inaccuracies in the analysis. 
  • If the appraisal comes in below an offer, buyers could have the option to increase the down payment to make up the difference or take some of the money set aside for a down payment to close the appraisal gap. 

It is also possible that a low appraisal is a sign that the offer price really is above the home’s true value and that the smartest thing for the buyer to do is to step away from the deal and move on to the next home. Having a REALTOR® who can provide sound advice on market conditions will be a tremendous value to buyers in this situation.

Click here to send any comments or questions about this piece to Virginia REALTORS® Chief Economist Lisa Sturtevant, PhD.

*Information as of 07/21/21