Dealing with Under-Appraisal Causes and Remedies
6 minute read
February 28, 2017


Working in the mortgage business, it was surprisingly common for a house to under-appraise. An under-appraisal can happen with any property, and in any type of market – whether it is a buyers market or a seller’s market.

If you’re looking to buy a new home or to refinance your current home, you should be aware of the possibility that it can under-appraise. Here are some common reasons why homes under-appraise, and what you should do if it happens to you.

Most Owners Have an Optimistic Idea of the Value of their Homes

This is especially true when homeowners are looking to refinance the property. For example, you may assume that your house is worth $300,000 because a property down the street sold for that price a few months ago. But in the process, you might completely ignore the fact that five other houses sold in your neighborhood for between $240,000 and $260,000 within the past six months.

In that situation, your entire perception of your home is skewed by the highest sale price in the neighborhood. You may ignore the fact that the highest sale is a larger home, or is in superior condition. It’s only when you have the property appraised that you realize that the true value is probably more like $250,000.

This is less an example of an under-appraisal than it is an overvaluation by the homeowner.

The House You Are Buying is Overpriced

Sometimes a house is simply overpriced. There are various reasons why this happens. Real estate agents typically perform a competitive market analysis to determine the fair price at which a property is likely to sell. This is very similar to an appraisal, except that it is performed by a real estate agent and not an appraiser.

Real estate agents determine the value of the property based on what other homes in the area have recently sold for. They will consider all of the sales in the neighborhood, which could be either your immediate subdivision or the general vicinity within one or two miles of the home. The agent will further narrow down the value by comparing the house to other properties that are most similar to the subject property.

Now, just because a real estate agent performs a competitive market analysis on the property doesn’t mean that that will be the price that the home will be listed for sale at. It’s not at all uncommon for the sales price to be set a little bit higher than the market value, and sometimes it’s set way above.

Sometimes this happens because the property seller simply insists on selling the home for a lot more money. After all, it’s natural to want to get the highest price possible for it. But there are also some relatively inexperienced real estate agents who will agree to list a property for sale at an inflated price, just to get the listing on the home.

If you successfully bid on a sales listing that is overpriced, the property is very likely to under-appraise, forcing you either to come up with a larger down payment or to renegotiate the sales price. Either outcome will be necessary because the lender will base the property value on the lower of the sale price or the appraised value.

The Property Has a Major Deficiency

There are times when the market value in the local neighborhood does support a certain price level. However, there could be a major deficiency with the property that lowers the value.

For example, the subject property may have two bedrooms, but be located in a market area that has predominantly three and four bedroom homes. Another example is property condition. If a house has serious deferred maintenance, it can be worth tens of thousands of dollars less than other homes in the area.

Similarly, if the property is located in a flood zone, has extensive termite damage, or is in need of a new roof, it can be worth tens of thousand dollars less than surrounding properties.

The Market has Declined in Your Area

Though the national housing market may be showing general improvement, the situation may be different in your local area. For example, if a major employer in your area is planning to shut down, that can depress property values. It’s also possible that markets go through various short cycle peaks and valleys. In this situation, property values may be higher in spring or summer than they are during fall or winter.

It’s possible for a house to under-appraise if the owner or seller believes the property to be worth the same thing that was a year or two ago when general values were higher. This is an example of how homeowners often assign the highest possible value to their homes and are reluctant to acknowledge a reversal of the trend.

Bidding Wars

Bidding wars are not at all uncommon in strong housing markets. Because housing inventory is so limited, multiple buyers may line up to buy the same homes. This can cause the sale price to rise above the asking price of the property – as well as above its fair market value.

Bidding wars are not accurate measures of property value. They’re based purely on emotion. Since it is very likely that property for sale is already listed at its highest possible market value, bidding the price higher will result in an excessive value.

Since the property sale price will rise above its market value, an appraiser will be unable to find comparable sales in the area that support that valuation. The result will be a classic under-appraisal.

What to do if a House You are Buying or Refinancing Under-appraises

In my many years in the mortgage lending business, the typical homeowner/home buyer reaction to an under-appraisal is to fight it. That’s exactly the wrong strategy, especially on a property that you were trying to buy.

Property valuation is not only subjective, but it’s also driven by emotion. As discussed earlier, a seller naturally wants to get as much for the property as possible. But buyers often become emotionally attached to a particular home, to the point of being willing to pay any price to get it.

An appraiser is not emotionally attached to the value outcome of property. In fact, obtaining an objective valuation is the entire purpose of having an appraisal performed on the property. For that reason, you should accept the value provided by the appraiser.

If you make an effort to fight to get the appraised value increased, you run the risk of your paying too much for the property or taking a larger mortgage on it than you should. In particular, if you’re buying a home that under-appraises, you should welcome it as an opportunity to renegotiate for a lower price, based on the actual appraisal.

To do otherwise will result in your paying more for the property than it’s actually worth.

Our advise is based on experience in the mortgage industry and we are dedicated to helping you achieve your goal of owning a home. We may receive compensation from partner banks when you view mortgage rates listed on our website.

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