When an Appraisal Holds Back a Home Sale

Here's what sellers and buyers can do if a home is valued lower than the price they agreed on in a contract.

I am in the process of selling my home and buying another. Purchase agreements have been hammered out, inspections have been done (and issues that were uncovered are being addressed), and the closing date has been set. There's just one last hurdle we have to clear before I'm ready to say with certainty that we are moving: the appraisal.

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Over the past three months, real estate appraisals have held back more than one-third of home sales, according to a survey by the National Association of Realtors. Of the Realtors surveyed, 9% said a contract was delayed because an appraisal came in below the negotiated price, 15% said a contract was renegotiated to a lower price and 11% said a contract was cancelled as a result of a low valuation.

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A low valuation can scuttle a deal if the buyers are relying on financing from a bank to purchase a home. Banks require appraisals to verify that a home's sale price is supported by its market value and won't issue a loan for more than the appraised value. However, there are several things buyers and sellers can do if an appraisal is lower than the price they agreed on, says Walter Molony, a spokesperson for the National Association of Realtors. "You don't have to sit there and silently take what happens," he says. Here are his tips:

Sellers can ...

-- Ask your lender, who ordered the appraisal, to speak with the appraiser if you feel that the appraisal does not accurately reflect the value of your property. The Truth in Lending Act allows the appraiser to be asked to provide further detail, substantiation or explanation for his or her conclusion about the value of a house and can be asked to consider additional, appropriate property information, including information about comparable properties, to make or support a valuation. For example, the appraiser might have used short sales and foreclosures when making comparisons for valuation purposes, and the low prices of these properties could be unduly influencing your home's appraisal.

-- Ask for a second appraisal, especially if the first one was done by an out-of-town appraiser who wasn't familiar with the market.

-- Pay for your own appraisal and, if the valuation is higher, use it to contest the first appraisal. To find a certified appraiser, visit the Appraisal Institute's Web site.

Buyers can ...

-- Try to renegotiate the price if you don't have the cash to cover the difference between what the bank is willing to lend and the negotiated price.

-- Ask for another appraisal if the seller won't agree to a lower price, and ask the lender to make sure that the appraiser distinguishes between distressed (foreclosures and short sales) and non-distressed properties when making comparisons for valuation purposes.

-- Cancel the contract if it was contingent upon your ability to secure a mortgage (and you aren't able to get a mortgage for the agreed upon percentage of the purchase price because of the low valuation).

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Editor's note: A previous version of this column incorrectly recommended that a home seller could ask an appraiser to reconsider his or her appraisal if the seller thought it didn't accurately reflect the value of the property. The seller should communicate concerns with the lender that ordered the appraisal, not with the appraiser, once an appraisal is complete.

Cameron Huddleston
Former Online Editor, Kiplinger.com

Award-winning journalist, speaker, family finance expert, and author of Mom and Dad, We Need to Talk.

Cameron Huddleston wrote the daily "Kip Tips" column for Kiplinger.com. She joined Kiplinger in 2001 after graduating from American University with an MA in economic journalism.