If you are planning to buy a house on a mortgage, expect the lender to commission an appraisal of the property to determine its true value. Unfortunately, the lender-commissioned appraisal may return a value lower than the one you agreed upon with the lender. Here are some of the possible reasons for this:
The Seller Inflated the Price
The appraisal may return a low value that is correct because the seller seriously inflated the original price. This may be the case if the seller is emotionally attached to the property and think it is more valuable than it is. In some cases, competition or bidding wars between multiple potential buyers also cause artificial price inflation. It may also be the case if the seller is just greedy and wants to mint as much money from the sale as possible.
The Property Values Are Increasing Fast
If you are buying a home in an upcoming area, then its appraisal may return a lower value not because the price was inflated, but because the costs of properties in the neighborhood are appreciating fast. This is likely to be the case if the sale has taken an agonizingly long time resulting in a serious difference between the price of the property and the prices of comparable sales in the area.
The Appraiser Has Made a Mistake
Human error can also lead to a low appraisal, especially if it occurs on the part of the appraiser. This can easily happen if an appraiser rushes the job in order to move on to the next one fast. Also, inexperienced appraisers or those who don't understand the local real estate industry are more likely to make such mistakes than experienced ones.
Lack of Relevant Data
Even if an appraiser doesn't make a mistake, it's possible for them to make a mistake if they don't have the right data for their work. A classic example is if there are few comparable properties in the area, and the appraiser has to move out of the neighborhood. In such a case, the appraiser can easily land "comparables" that don't fit the nature of the property for sale, leading to a low appraisal.
You have several options if the appraisal comes in short. For example, you can increase the down payment, dispute the appraisal, or buy mortgage insurance. All of these options have their pros and cons, and you should discuss them with your real estate agent to determine the best way forward for your case.