Can a Buyer Back Out if an Appraisal Is Low?

A low appraisal occurs in a real estate transaction when the professional valuation of a property comes in below the agreed-upon purchase price. This discrepancy typically impacts home financing, as mortgage lenders base the maximum loan amount on the appraised value, not the purchase price. A low appraisal creates an “appraisal gap” that must be addressed for the sale to proceed. This situation can complicate transactions for both buyers and sellers, potentially delaying or even derailing the transaction.

Understanding the Appraisal Contingency

A common protective measure in real estate contracts is the appraisal contingency. This clause safeguards a buyer’s financial interests if the home’s appraised value is less than the agreed-upon price. It serves as a condition that must be satisfied before the sale can finalize, ensuring the buyer is not obligated to overpay for a property.

The appraisal contingency allows the buyer to renegotiate the purchase price or terminate the contract without financial penalty, retaining their earnest money deposit. Earnest money, a good-faith deposit demonstrating commitment, usually ranges from 1% to 3% of the purchase price, though it can be higher in competitive markets, sometimes reaching up to 10%. If the appraisal comes in low and the contingency terms are met, the buyer can walk away, and their earnest money is typically returned.

The specific language of an appraisal contingency can vary. A standard contingency provides full protection, enabling the buyer to cancel if the appraisal is insufficient. Some buyers might include an appraisal gap coverage clause, agreeing to cover a portion of the difference between the appraised value and the purchase price out-of-pocket to make their offer more appealing. The precise wording of this contingency determines a buyer’s ability to navigate a low appraisal scenario.

Buyer’s Choices After a Low Appraisal

If an appraisal contingency is in place and the home appraises for less than the agreed-upon price, buyers typically have several choices. One primary option is to renegotiate the purchase price with the seller. The buyer can request the seller reduce the price to match the lower appraised value, aiming to eliminate the appraisal gap.

Alternatively, the buyer can cover the appraisal gap themselves. This involves paying the difference between the appraised value and the original purchase price in cash, increasing their down payment. This option allows the transaction to proceed without changing the loan amount from the lender. The seller might also offer concessions, such as covering closing costs, to help the buyer bridge the financial gap.

The third choice, if negotiations fail and the appraisal contingency terms are met, is to terminate the contract. This allows the buyer to back out of the deal without forfeiting their earnest money deposit. While often a last resort, it provides financial protection against overpaying for a property.

Scenarios Without an Appraisal Contingency

In some real estate transactions, a buyer may waive the appraisal contingency. This often occurs in competitive housing markets where buyers seek to make their offers more attractive. Cash buyers also may not include an appraisal contingency, as they are not reliant on lender financing.

When an appraisal contingency is not part of the contract, the implications for the buyer facing a low appraisal are significant. Backing out without this protection becomes more difficult, often resulting in forfeiture of the earnest money deposit. The earnest money, which can be substantial, is at risk if the buyer cannot complete the purchase.

The primary consequence in such a scenario is that the buyer would typically need to pay the entire appraisal gap in cash to secure financing and proceed with the purchase. If the buyer lacks the funds to cover this difference, they risk losing their earnest money if they walk away. This can lead to the buyer overpaying for the property, potentially resulting in negative equity from the outset.

Steps to Take When an Appraisal is Low

When a home appraisal comes in low, several steps can be taken to address the situation. A first action involves thoroughly reviewing the appraisal report for any potential errors or omissions. Buyers should scrutinize details such as the number of bedrooms and bathrooms, square footage, and the comparable sales used by the appraiser. Identifying factual inaccuracies can provide grounds for challenging the valuation.

If discrepancies or overlooked information are found, a buyer can request a reconsideration of value (ROV). This formal process involves submitting supporting documentation, such as more relevant comparable sales data or details of property improvements, to the lender and appraiser. The lender will then relay this information to the appraiser for review.

Negotiation strategies also become important. Buyers can leverage the low appraisal to reopen discussions with the seller, presenting the appraisal report and any additional comparable sales data to justify a price reduction. The seller might be willing to meet halfway on the appraisal gap or offer concessions, such as covering closing costs, to keep the deal alive. Emphasizing that a future buyer might encounter the same appraisal issue can strengthen the buyer’s negotiating position. Throughout this process, clear communication with real estate agents and lenders is important for finding a solution.