What Happens If an Appraisal Comes In Lower Than Offer?

An appraisal serves as an independent assessment of a property’s market value in nearly every real estate transaction involving financing. A licensed appraiser conducts this valuation, considering the property’s condition, size, location, and recent sales of comparable homes. Lenders rely on the appraisal to determine the maximum loan amount they will provide. A common scenario arises when the appraisal value comes in below the agreed-upon purchase price, creating a financial hurdle.

Understanding the Immediate Financial Impact

A low appraisal directly impacts the loan-to-value (LTV) ratio, a metric lenders use to assess risk and determine the maximum loan amount. The LTV is calculated by dividing the loan amount by the appraised value. For instance, if a lender offers an 80% LTV, and the property is appraised at $400,000, the maximum loan would be $320,000, regardless of a higher agreed-upon purchase price. If the buyer and seller agreed on a $420,000 purchase price, there would be a $20,000 gap the lender will not cover.

Most standard purchase agreements include an appraisal contingency. This clause makes the sale dependent on the property appraising for at least the purchase price. If the appraisal comes in lower than the agreed-upon price, this contingency allows the buyer to terminate the contract and receive their earnest money deposit back without penalty. Without such a contingency, a buyer might be contractually obligated to proceed, potentially losing their earnest money if they cannot secure adequate financing due to the appraisal gap.

When an appraisal is low, the buyer must either bridge the gap with additional cash, renegotiate the price, or walk away from the deal. Lenders base their loan approval on the lesser of the purchase price or the appraised value. A low appraisal directly limits the financing available, shifting the burden of the difference onto the buyer’s liquid assets.

Buyer’s Paths Forward

When facing a low appraisal, a buyer has several paths to consider.

Renegotiate the Purchase Price

One approach involves attempting to renegotiate the purchase price with the seller. The buyer can present the appraisal report and request the sales price be reduced to match the appraised value, or a figure closer to it. This strategy aims to eliminate or reduce the appraisal gap, allowing the buyer to secure financing without needing to bring additional cash to closing.

Pay the Difference in Cash

Another option is for the buyer to pay the difference between the appraised value and the agreed-upon purchase price in cash. This means the buyer would cover the appraisal gap out of their own funds, in addition to their down payment and closing costs. For example, if the purchase price is $300,000, the appraisal is $280,000, and the buyer has a 20% down payment, they would need to bring an extra $20,000 in cash to cover the shortfall. This path requires the buyer to have sufficient liquid assets beyond what was initially planned for the down payment.

Request a Reconsideration of Value (ROV)

While a buyer cannot directly challenge an appraisal, they can work with their lender to initiate a reconsideration of value (ROV). This process involves submitting compelling evidence to the lender, who then forwards it to the appraiser for review. Evidence typically includes recent comparable sales (comps) not considered in the original appraisal, or factual errors within the report, such as incorrect square footage or property features. The appraiser will then review the new information and may or may not adjust their valuation.

Walk Away from the Deal

If the appraisal contingency is in place and the parties cannot agree on a resolution, the buyer retains the right to walk away. Terminating the contract under the appraisal contingency allows the buyer to receive their earnest money deposit back, provided all contractual deadlines and notice requirements are met. Walking away means the buyer must restart their home search, potentially incurring additional costs and delays.

Seller’s Responses

Upon notification of a low appraisal, the seller faces a range of decisions.

Lower the Sales Price

One response is for the seller to lower the sales price to match the appraised value. This action addresses the appraisal gap, enabling the buyer to secure financing without bringing additional cash. While it means a lower sale price for the seller, it often preserves the deal and avoids the uncertainty of relisting the property.

Request Buyer Cover the Difference

Alternatively, the seller might request the buyer cover the entire difference between the appraised value and the original offer price. This approach insists the buyer adhere to the initially agreed-upon purchase price. The seller’s willingness to take this stance often depends on market conditions and the perceived strength of their position, such as if there were multiple offers on the home.

Offer a Seller Credit

A seller could also offer a seller credit, a concession made to the buyer at closing. This credit can help the buyer offset some of their closing costs, effectively reducing the cash the buyer needs to bring to the table. While a seller credit does not directly reduce the purchase price or the appraisal gap, it can indirectly assist the buyer by freeing up funds that could then be used to cover part of the appraisal shortfall. For example, a $5,000 seller credit might allow the buyer to allocate more of their available cash towards the appraisal difference.

Challenge the Appraisal

The seller, often through their listing agent, can challenge the appraisal by requesting a reconsideration of value (ROV). The seller or their agent would compile a list of strong comparable sales that were either missed or undervalued by the appraiser, along with any factual inaccuracies in the report. This information is then submitted to the buyer’s lender, who forwards it to the appraiser for review. A successful challenge could result in an upward adjustment of the appraisal value, potentially closing the gap.

Refuse Renegotiation

If the seller is unwilling to lower the price or offer concessions, they retain the right to refuse renegotiation and put the home back on the market. This decision carries the risk of losing the current buyer and potentially facing another low appraisal with the next prospective buyer. However, in a strong seller’s market, they might believe they can find another buyer willing to pay the original price, possibly with a larger cash down payment or a waiver of the appraisal contingency.

Navigating the Contingency and Beyond

Navigating a low appraisal begins with a thorough review of the purchase agreement, particularly the appraisal contingency clause. This section outlines specific deadlines for the appraisal to be completed and for any notices regarding a low valuation to be delivered. It also details the conditions under which the buyer can terminate the contract and reclaim their earnest money, often requiring written notification within a stipulated timeframe after receiving the appraisal report.

In situations where a buyer has waived the appraisal contingency, the risks are elevated. By waiving this protection, the buyer agrees to proceed with the purchase regardless of the appraised value. If the appraisal comes in low, the buyer is still contractually obligated to close the deal at the agreed-upon price. This often means the buyer must cover the entire appraisal gap with cash, in addition to their planned down payment. Failure to do so could result in the forfeiture of their earnest money deposit, as they would be in breach of contract.

Communication and negotiation are important when a low appraisal occurs. Buyers, sellers, and their real estate agents must engage in open dialogue to explore solutions. This collaborative effort might involve discussing price adjustments, seller credits, or the buyer bringing additional cash to closing. Agents facilitate these discussions, presenting options, and helping to mediate a mutually agreeable resolution.

Once a resolution is reached, whether it involves a price reduction, a buyer covering the gap, or a seller credit, an amendment to the original purchase agreement is drafted and signed by both parties. This amendment formally documents the new terms and ensures all parties are aligned on the path forward. If a resolution cannot be reached and the buyer chooses to terminate the contract under the appraisal contingency, the process shifts to the return of the earnest money and the seller relisting the property. The swift return of earnest money is generally facilitated by the escrow agent upon receipt of a signed termination agreement.