Buying a home can be a thrilling experience, but it can also be overwhelming, especially when navigating the complex process of securing a mortgage. One crucial step in this process is the home appraisal, which can make or break a deal. But what exactly happens during an appraisal?
Our Houston real estate lawyers will demystify the home appraisal process and explain what it entails. After reading, you will understand why this process is essential for all parties involved.
A Closer Look at the Home Appraisal Process
When you purchase a home, your lender typically hires a certified or licensed appraiser to evaluate the property’s value. This appraiser will conduct a thorough inspection of the property, both inside and out, to ensure it’s safe and structurally sound.
They’ll also take note of any significant upgrades or changes since the last transaction and may even provide photographs of the property. While the homeowner may be present during the appraisal, it’s less common for the buyer to attend.
For lenders, an appraisal protects against default payments by ensuring the property’s value is sufficient to secure the loan. For buyers, an appraisal prevents overpayment by providing an independent assessment of the property’s worth.
An appraisal can also impact loan approvals, terms, and even the selling price of the property. Buyers can renegotiate a better price if the appraised value is lower than the initial offer.
What Happens if a Home Appraisal Comes in Low?
A low appraisal does not automatically terminate a deal, but it can complicate the transaction. When the appraised value comes in below the agreed purchase price, the lender will not finance the loan at the original amount because the property no longer supports it as collateral.
From there, buyers and sellers generally have four options:
- The buyer covers the gap between the appraised value and the purchase price in cash
- The seller lowers the price to match the appraisal
- The parties split the difference
- The buyer terminates the contract under a financing or appraisal contingency and recovers earnest money
The option that makes the most sense depends heavily on the contract’s specific language and deadlines. Most Texas contracts include a financing contingency that protects a buyer who cannot secure a loan at the agreed-upon terms because of a low appraisal.
Requesting a review of the appraisal does not automatically pause the financing or closing deadlines already running under the contract, so all parties should keep a close eye on the calendar while any dispute plays out.
Why an Appraisal Might Come in Low
An appraisal can come in low for several reasons that have nothing to do with the price you negotiated. The appraiser may have used comparable sales that do not fully reflect recent upgrades or a hot local market.
A cooling market, unique property features the appraiser struggled to value, or simple errors in the report can all contribute to a lower value. In competitive markets, buyers sometimes agree to pay more than recent sales data supports, which an appraisal is not designed to capture.
How to Dispute a Home Appraisal in Texas?
If you believe an appraisal is inaccurate, you cannot typically contact the appraiser directly to demand a new number. Instead, the dispute process runs through the lender, to whom you may be able to submit a Reconsideration of Value, or ROV.
This is a formal request, submitted by the lender, asking the appraiser to review specific comparable sales or factual errors that may have been overlooked. A successful ROV depends on presenting an evidence-based case, not simply disagreeing with the outcome.
Useful grounds for an ROV typically include:
- Comparable sales that closed before the appraisal’s effective date but were not considered
- Factual errors in the report, such as an incorrect square footage or lot size
- Unsupported adjustments between the subject property and the comps used
- Overlooked upgrades, renovations, or unique features
An ROV is not a guarantee. The appraiser may revise the value, correct an isolated error, or explain why the original conclusion stands.
Why ROV’s Are Challenging to Win
An ROV asks an appraiser to revisit a conclusion they have already reached. Under a tight closing timeline, success rates for these requests tend to be low.
If the ROV does not resolve the dispute, the remaining options are usually limited to renegotiating the price, covering the gap, or terminating under an available contingency.
Having an attorney review the purchase agreement as soon as a low appraisal comes in helps protect your position and your earnest money.
The Importance of Accurate Property Valuation
A home appraisal is a crucial component of the home-buying process. By understanding what happens during an assessment and why it’s essential, you’ll be better prepared to initiate real estate transactions.