It’s a frustrating thing to buy or sell a home and find out that it’s not worth what you thought it would be. The real estate industry is no stranger to low appraisals, especially in today’s market, and there are plenty of reasons why they happen.
From improvements not being worth what you expected to poor comps, we are highlighting some of the main reasons why appraisals come in low. Read on to find out what they are.
Above-Ground vs. Below-Ground Square Footage
You can find a home with the nicest basement out there with solid improvements and nice finishes. Nevertheless, the value of below-ground square footage is calculated differently than the square footage above the ground. Even if the basement increases the size of the house considerably, the space upstairs will always be worth more.
Sometimes, below-ground and above-found footage isn’t correct in the listing or in the available records for the home. One of the main reasons appraisals come in low is that the appraiser corrects this error, which adjusts the value of the home.
Improvements May Not Be as Valuable as You Might Think
Many home sellers make improvements to homes before selling. Improvements usually increase the value of a property, but they are not always as valuable as one would expect.
An extensive kitchen remodel is the perfect example of where you can spend a lot on improvements. However, you won’t make all that money back when selling. Even if your improvements are nice, they will likely not be worth as much as you paid for them.
The Appraiser Doesn’t Know the Area
Your appraiser may not necessarily be from the area where your home is located. There are so many nuances to cities and neighborhoods, so it’s really important to have a local appraiser who knows what adds and subtracts value from a home.
Perhaps there is a high-quality school district in that neighborhood, or perhaps it’s very walkable compared to neighborhoods nearby. These things can add value to a home. It is also possible that your appraiser does not know the value of improvements to your property compared to other homes in the area.
Multiple Offers Drove the Price Up
Especially in today’s market, a home may end up in a bidding war. In which case could drive the price up to an amount that’s inconsistent with the appraisal. This is especially true in hot housing markets that have very low inventory and are sold for more than they are worth.
There Aren’t Enough Good Comps
Appraisers work with historical data to determine value. They also measure your home against similar homes in the same area that have been sold recently.
In some scenarios, bad comps cause confusion. For instance, there could be a comparable property that was in bad shape when it was sold and then was fixed up. If an appraiser is not aware of the property’s history, that rehabilitated home would make for a bad comp.
There are also missed comps, which may include a home that was recently sold but has not yet been recorded by the time the appraisal happened. Missed comps also happen when counties have a backlog, or when tax information is not yet public record.
If there are not enough good comps for the appraiser, they could look into comps outside the community. This scenario increases the chances that the appraisal won’t be accurate.
Rapidly Changing Market Conditions
If a market is moving faster than usual, appraisal values are likely to be below-market prices. Past data, even if it’s recent, will not be able to keep up with present prices in markets that are moving rapidly.
There are many reasons why your appraisal can come in low, but thankfully, there are processes in place to deal with the issue. A great AMC goes a long way toward making sure there’s an accurate appraisal every single time.
The appraisal process can be difficult, but Kairos Appraisal can help you along the way. If you are interested in working with Kairos Appraisal Services, reach out at [email protected] or (425) 967-3794.