Is a Low Appraisal Good for a Buyer?

A home appraisal serves as an independent assessment to determine a property’s fair market value. Mortgage lenders typically require this evaluation to ensure the loan amount aligns with the property’s actual worth. The appraisal process usually occurs after a buyer’s offer has been accepted, with the buyer generally covering the cost, which can range from $300 to $600. When an appraisal comes in lower than the agreed-upon purchase price, it creates a significant situation for the buyer. This means the lender believes the home is not worth the amount the buyer has contracted to pay, directly impacting financing and the overall transaction.

Potential Upsides for the Buyer

A low appraisal can present a buyer with an advantageous position during a real estate transaction. It offers an opportunity to renegotiate the purchase price, potentially leading to significant savings. The appraisal report provides objective data supporting a lower valuation, a powerful tool in discussions with the seller. This situation often gives the buyer considerable leverage, especially if the seller is motivated to complete the sale quickly.

A low appraisal can also function as a “red flag,” indicating that the property might be overpriced for current market conditions. This objective assessment prevents a buyer from overpaying for a home, ensuring the agreed-upon price reflects its true market value. By prompting a re-evaluation of the property’s worth, a low appraisal protects the buyer from potential financial overcommitment. It encourages a more informed decision based on an independent valuation.

Navigating Financial Hurdles

A financial challenge known as an “appraisal gap” emerges when a home appraises for less than the agreed-upon purchase price. This gap represents the difference between the contract price and the lower appraised value. For example, if a home is under contract for $400,000 but appraises at $380,000, the appraisal gap is $20,000.

Mortgage lenders typically base their loan amount on the appraised value of the home, not the purchase price. This means if the appraisal comes in low, the lender will only finance a percentage of the lower appraised value, leaving the buyer responsible for covering the shortfall. The buyer must then find a way to cover this appraisal gap, usually by bringing additional cash to the closing. For instance, if a buyer planned a 20% down payment on a $400,000 home ($80,000) but it appraises at $380,000, the lender will only finance 80% of $380,000 ($304,000). The buyer would then need to cover the original $80,000 down payment plus the $20,000 appraisal gap, totaling $100,000 in cash. This immediate need for extra funds can place a considerable financial burden on the buyer, potentially impacting their ability to proceed with the purchase.

Strategies for Moving Forward

Upon receiving a low appraisal, buyers have several actionable strategies to consider. One common approach involves renegotiating the purchase price with the seller. The buyer’s agent can present the appraisal report to the seller, requesting a price reduction to match the appraised value or a compromise where both parties split the difference. This negotiation leverages the appraisal as objective evidence of the property’s market value, often motivating the seller to adjust the price to keep the deal alive.

Another option is to formally contest the appraisal through a “Reconsideration of Value” (ROV). This process involves the buyer’s lender submitting a request to the appraiser to review their findings. To initiate an ROV, the buyer or their agent must provide compelling evidence, such as overlooked property improvements, factual errors in the report, or more relevant comparable sales that were not initially considered. The lender must initiate this request, and it is not guaranteed to result in a change to the appraised value.

If the buyer remains committed to the home and renegotiation or contesting the appraisal is unsuccessful, the buyer may choose to make up the difference in cash. This means paying the appraisal gap out of pocket at closing, in addition to their planned down payment. This option requires the buyer to have sufficient liquid funds available to cover the additional amount.

Finally, if none of the other strategies are viable or desirable, the buyer can choose to walk away from the transaction. This is possible without losing their earnest money deposit if the purchase contract includes an appraisal contingency clause. An appraisal contingency is a provision that allows the buyer to terminate the agreement if the home does not appraise for the agreed-upon price, safeguarding the buyer’s financial interests.