Home appraisals play a crucial role in real estate transactions, particularly for lenders who rely on them to assess the fair market value of a property before issuing a mortgage. While appraisals are meant to provide a neutral, data-driven valuation, they are not always final — and when they change mid-process, the consequences for a transaction can be severe.
How Lenders Use Appraisals
Lenders require appraisals to protect their investment by ensuring that they are not loaning more money than a home is worth. Since the property serves as collateral for the loan, an accurate appraisal helps the lender determine several critical factors.
What Lenders Evaluate
- Loan-to-Value Ratio (LTV) — The percentage of the loan compared to the home's value. If the LTV is too high, a lender may require a larger down payment or adjust loan terms.
- Risk assessment — Lenders use appraisals to evaluate whether a borrower might default. If the home is overvalued, the lender risks losing money if they need to foreclose and resell the property.
- Loan approval or denial — If an appraisal comes in too low, it can affect whether a loan is approved at all, forcing buyers to either negotiate a lower price, increase their down payment, or walk away.
When an Appraisal Changed and Ruined a Transaction
A real-world example of an appraisal impacting a deal involved a buyer under contract on a home for $975,000 in a competitive market. Initially, the appraiser valued the home at $980,000, which was sufficient for loan approval with favorable terms.
However, during the underwriting process, the lender conducted a random appraisal review — a common practice when a loan is considered higher risk due to market volatility or specific lender policies. The second appraiser, unfamiliar with the local market, came back with a significantly lower valuation of $910,000, citing concerns over a perceived decline in comparable sales.
$975K
Contract Price
$980K
Initial Appraisal
$910K
Revised Appraisal
This sudden revision threw the entire transaction into jeopardy. The lender, bound by the second appraisal, adjusted the loan terms based on the lower valuation, reducing the loan amount and increasing the buyer's required down payment by nearly $50,000. The buyer, unable to cover the difference, was forced to either renegotiate the price, switch lenders, or terminate the contract. The seller, unwilling to lower the price, ultimately lost the deal, and the home was relisted.
A $70,000 swing between the initial and revised appraisal killed a deal that both parties wanted to close. The second appraiser had never worked in the neighborhood.
How an Appraisal Can Change Mid-Process
While most appraisals hold firm, there are instances where lenders or external factors trigger a review or revision that can unexpectedly impact a transaction.
5 Ways an Appraisal Can Be Revised
- Appraisal reviews and secondary valuations — Lenders often conduct random appraisal reviews, ordering a second opinion from another appraiser. If the second valuation is lower, the lender may default to the lower number.
- Underwriter challenges — If an underwriter believes an appraisal is inflated or lacks strong comparable sales, they can request an adjustment, leading to a downward revision.
- Market volatility — If the market shifts between the initial appraisal and loan approval, lenders may reassess the valuation, particularly in rapidly cooling markets.
- Regulatory compliance issues — If an appraisal is flagged for USPAP violations, inaccuracies, or lack of proper documentation, it may be revised or discarded, requiring a new appraisal.
- Changes in loan type — If a buyer switches from a conventional loan to FHA or VA financing, the new loan may require a stricter appraisal process, leading to different valuation criteria and potentially a new, lower appraisal.
What Can Buyers, Sellers, and Agents Do?
Since an appraisal revision can unexpectedly derail a transaction, preparation and strategy are key.
- For buyers — Be prepared to cover a potential shortfall between the purchase price and a lower appraisal by securing additional funds or negotiating seller concessions.
- For sellers — Work with an agent to price the home strategically and ensure the appraiser has access to all relevant upgrades and local sales comps that support the value.
- For agents — If an appraisal is unexpectedly low, provide additional market data and request a Reconsideration of Value (ROV) from the lender. Prepare clients for potential appraisal fluctuations, particularly in uncertain market conditions.
ROV
Reconsideration of Value
When an appraisal comes in low, agents can submit a formal request to the lender with additional comparable sales data and market evidence. It doesn't always work — but it's the single most effective tool available before resorting to renegotiation or a second appraisal.
At Adam Timothy Group, we've seen firsthand how a revised appraisal can completely shift the course of a transaction. While appraisals are a necessary safeguard for lenders, they can also create significant roadblocks for buyers and sellers. That's why we work proactively to provide comprehensive market data, assist in negotiating appraisal disputes, and guide our clients through every step of the process.
Concerned About an Appraisal?
We provide comprehensive market data, assist in negotiating appraisal disputes, and guide our clients through every step. If you have concerns about an appraisal or need expert advice on navigating the process — we're here to help.
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