What Happens If an Appraisal Is Lower Than the Offer?

When a home appraisal yields a value lower than the agreed-upon offer price, it introduces a challenge in real estate transactions. This situation can complicate the path to closing for both the buyer and the seller. A low appraisal directly impacts financing and contractual obligations, requiring clear communication and negotiation to navigate successfully.

Understanding the Appraisal Gap

A home appraisal is an assessment conducted by a licensed professional to determine a property’s fair market value. Lenders require this evaluation to ensure the home’s value supports the loan amount they are considering providing. The appraiser considers various factors, including the home’s physical attributes, condition, location, and recent sales of comparable properties in the area.

An “appraisal gap” occurs when the appraiser’s estimated value for the property is less than the price agreed upon in the sales contract. This difference creates a shortfall that must be addressed. Several factors can contribute to a low appraisal, including rapid market appreciation where home prices increase faster than comparable sales data can keep up, or a seller overpricing their home. Additionally, unique property characteristics, a lack of recent comparable sales, or overlooked home improvements by the appraiser can lead to a lower valuation.

How a Low Appraisal Impacts the Transaction

A low appraisal directly impacts the financing aspect of a home purchase. Mortgage lenders base the maximum loan amount on the appraised value of the home, not the agreed-upon purchase price. If a home appraises for less than the offer, the buyer’s lender will not approve a mortgage for the full purchase price. This situation directly affects the buyer’s loan-to-value (LTV) ratio and can necessitate a larger down payment or a reduction in the loan amount.

For instance, if a buyer agrees to purchase a home for $300,000 with a 10% down payment ($30,000) and seeks a $270,000 mortgage, but the home appraises at $260,000, the lender may only approve a loan based on the $260,000 value. This leaves a $40,000 gap that the buyer must cover, either by increasing their down payment or renegotiating the price. Without a resolution, the transaction cannot move forward.

An “appraisal contingency” in the purchase agreement is important. This clause allows the buyer to back out of the deal without penalty if the appraisal comes in below the agreed-upon price. It protects the buyer from overpaying or securing unobtainable financing. If an appraisal contingency is not included or waived, the buyer faces a higher financial risk and may lose their earnest money if they cannot close the deal.

Buyer’s Available Paths Forward

When facing a low appraisal, buyers have several strategies. One option is for the buyer to pay the difference between the appraised value and the offer price out of pocket. This means bringing additional cash to cover the appraisal gap, which can impact the buyer’s liquid assets and overall financial plan.

Another path involves renegotiating the purchase price with the seller. The buyer can present the appraisal report to the seller and request that the sale price be lowered to match the appraised value. This approach aims to align the contract price with the property’s assessed value.

Buyers might also request seller concessions. The seller could offer credits towards closing costs or other financial incentives. This can help offset some of the buyer’s increased financial burden without reducing the gross sale price for the seller.

Challenging the appraisal is another option, through a “Reconsideration of Value” (ROV). This involves submitting additional comparable sales data, highlighting factual errors, or pointing out overlooked property features that could increase value. An ROV may result in an adjusted appraisal, but success is not guaranteed, and it may delay the closing process.

Finally, the buyer may choose to walk away from the deal. This allows the buyer to terminate the contract and recover their earnest money deposit without penalty if a satisfactory resolution cannot be reached. It protects the buyer from overpaying for a property or committing to a loan they cannot obtain.

Seller’s Available Paths Forward

Sellers also have choices when a home appraisal comes in lower than the agreed-upon offer. One common response is for the seller to lower the purchase price to match the appraised value. This decision can help keep the current buyer engaged and move the transaction forward, especially if motivated to sell quickly or if the appraisal gap is small.

Alternatively, sellers can offer concessions to the buyer. This might include providing a credit for closing costs, covering a portion of the appraisal gap directly, or offering other financial incentives. These concessions can help the buyer cover the additional cash needed to close the deal.

A seller may also choose to stand firm on the original purchase price. The seller refuses to adjust the price or offer concessions, expecting the buyer to cover the entire appraisal gap. This approach carries the risk that the buyer might walk away from the deal.

Should the current deal fall through, the seller has the option to relist the property. This allows the seller to seek a new buyer who might pay the original price or make a cash offer. However, it can lead to additional time and renewed marketing efforts. Relisting may also necessitate a price adjustment based on the new appraisal.