Appraisal Is Not the Same Thing as Market Value
A house goes under contract for $650,000.
The appraiser says it's worth $640,000.
So the house is worth $640,000, right?
Not necessarily.
An appraisal is an important professional opinion of value. When a lender requires one, it can have a very real effect on whether and how the transaction moves forward.
But I don't think we should confuse **the appraised value** with some objectively correct number that has now been discovered.
Real estate doesn't work quite that neatly.
An Appraisal Is an Opinion of Value
A real estate appraiser doesn't simply look up the value of the house somewhere.
The appraiser evaluates the property, analyzes relevant market information and comparable sales, makes adjustments where appropriate, and develops an opinion of value.
There is professional methodology behind that process.
There is also judgment.
Which comparable sales are most relevant?
How much does a particular difference between properties matter?
How should the appraiser account for condition, location, lot characteristics, improvements or other differences?
Qualified appraisers can look at the same general market information and reach somewhat different conclusions.
That's not necessarily evidence that one of them did something wrong.
It's evidence that valuation involves professional judgment.
The Market Has Already Given Us Another Piece of Information
Suppose a house was listed for $650,000.
A buyer looked at it, considered the alternatives available in the market and offered $650,000.
The seller accepted.
That doesn't prove the property is worth exactly $650,000 either.
But I wouldn't dismiss it as irrelevant.
We have an actual buyer willing to pay that amount and an actual seller willing to accept it.
That's useful market information.
If the appraisal comes back at $640,000, we now have two pieces of information that don't quite agree: an arm's-length transaction at $650,000 and an appraiser's opinion at $640,000.
The appraisal matters.
So does the contract.
Why the Appraisal Matters So Much Anyway
If you're paying cash, you may decide whether you want an appraisal at all.
With a mortgage, the lender has its own interest in the property's value because the house is collateral for the loan.
The lender isn't simply asking, “Does the buyer think this house is worth $650,000?”
It wants an independent valuation supporting the lending decision.
That's why an appraisal that comes in below the contract price can create a problem even when the buyer remains perfectly comfortable with the price.
The lender's willingness to finance the transaction may be based on the appraised value rather than the price the buyer agreed to pay.
A Low Appraisal Doesn't Automatically Mean Someone Overpaid
This is where I think the conversation sometimes goes off the rails.
If a property is under contract for $650,000 and appraises for $640,000, it's tempting to say:
**See? The buyer was overpaying by $10,000.**
Maybe.
But the appraisal itself doesn't prove that.
Perhaps the contract price was aggressive.
Perhaps the appraiser selected different comparable sales than another appraiser would have.
Perhaps there is something about the house that this particular buyer values more highly than the appraisal methodology captures.
Or perhaps $640,000 really is the better-supported estimate of market value.
The point isn't that the appraisal should be ignored.
The point is that we should understand what it is: a professional opinion with an important role in the lending process.
What Happens When the Appraisal Is Low?
That depends on the contract.
Colorado's Commission-approved Contract to Buy and Sell Real Estate includes provisions addressing appraisal and appraisal objections. The actual rights and deadlines depend on the executed contract, so this is one of those places where I want to look at what **your contract actually says**, not rely on a generic internet explanation.
Depending on the circumstances and the contract, the parties may discuss a price change, the buyer may decide to bring additional cash, the appraisal may be challenged through the appropriate process, or the buyer may have contractual options related to the appraisal.
Those are transaction-specific decisions.
A $5,000 appraisal gap on one purchase may be handled very differently from a $50,000 gap on another.
Price Isn't a Scientific Constant
Real estate valuation would be much easier if every house had one objectively correct value.
It doesn't.
We can analyze comparable sales. We can look at active competition. We can consider condition, location, improvements, market activity and a long list of other factors.
Those things help us develop a reasonable range and make better decisions.
But eventually a real buyer and a real seller have to agree on a price.
An appraiser may then provide another informed opinion.
Those numbers may be identical.
They may not be.
Use the Appraisal for What It Tells Us
If an appraisal comes in low, I'm not going to dismiss it because we don't like the answer.
I want to understand it.
What comparable sales did the appraiser use?
Were there important differences?
Is there factual information about the property that may have been missed?
Does the appraisal change how you feel about the price?
Does it create a financing problem?
And what options does the contract give you?
Those are more useful questions than treating the appraised value as either meaningless or unquestionable.
An appraisal deserves serious consideration.
It just isn't the same thing as a price tag handed down from above.