What Happens if the Appraisal Is Lower Than the Offer?

When a home appraisal comes in lower than the agreed-upon offer, it can introduce complexities into a real estate transaction. A home appraisal is an independent assessment of a property’s market value, conducted by a licensed appraiser. This valuation is a standard step in home financing, providing an objective estimate of the home’s worth and safeguarding all parties.

Buyer’s Choices When an Appraisal is Low

If a home appraisal comes in lower than the offer price, the buyer faces several options. One common approach is to renegotiate the purchase price with the seller, requesting a reduction to align with the appraised value. This helps ensure the buyer does not overpay.

Another choice is for the buyer to pay the difference in cash. This means covering the gap between the appraised value and the offer price from their own funds, increasing their upfront contribution. This allows the mortgage loan to proceed based on the lower appraised value.

Buyers may also walk away from the deal, especially if their purchase agreement includes an appraisal contingency. This clause allows the buyer to terminate the contract and recover their earnest money if the appraisal value is less than the agreed price and no resolution is reached. Without it, walking away might forfeit the earnest money.

Buyers or their agents can also challenge the appraisal. This involves requesting a reconsideration of value from the appraiser, providing additional comparable sales data or pointing out factual errors. Successful challenges are not guaranteed and require solid evidence.

Seller’s Choices When an Appraisal is Low

When an appraisal comes in below the offer price, sellers have distinct choices. The most direct response is to lower the sale price to match the appraised value. This can be a practical solution, especially if the seller is motivated or if market conditions make finding another buyer at the original price challenging.

Sellers can also offer concessions to the buyer. Instead of reducing the sale price, they might offer credits or pay a portion of the buyer’s closing costs. This helps bridge the financial gap without lowering the home’s stated price, making the deal more feasible for the buyer.

Sellers are not obligated to adjust their price or offer concessions; they can hold firm on the original offer. However, this risks the buyer exercising an appraisal contingency and terminating the contract.

Sellers or their agents can also challenge the appraisal if they believe it is inaccurate. This involves providing the appraiser with comparable sales data or documenting overlooked property improvements. A reconsideration request requires detailed information to support a higher valuation.

If no resolution is reached, the seller can relist the property. This might occur if the seller is unwilling to lower the price or offer concessions, hoping to find a new buyer whose lender’s appraisal is higher, or a cash buyer.

The Lender’s Perspective and Requirements

The lender plays a central role when an appraisal is lower than the offer, due to their risk assessment. Lenders use the loan-to-value (LTV) ratio to determine the maximum loan amount. The LTV ratio compares the loan amount to the property’s value, calculated as the loan divided by the lower of the purchase price or appraised value.

For instance, if a home is offered at $300,000 but appraises at $280,000, and the buyer seeks an 80% loan, the lender bases the loan on $280,000. The maximum loan would be $224,000 ($280,000 x 0.80), leaving a $20,000 gap ($300,000 – $280,000) the buyer must cover in cash. This protects the lender’s investment.

A low appraisal can prevent the buyer from securing the full loan, creating a financing gap. The lender’s stance is non-negotiable regarding the loan amount in relation to the appraised value. They will not lend more than a certain percentage of the appraised value, regardless of the purchase price, to mitigate financial risk.

Appraisal contingencies are important from the lender’s viewpoint. While protecting the buyer, they also indirectly protect the lender by ensuring the property’s value supports the loan amount. If the appraisal is low and the deal falls apart, the lender avoids making a loan on an overvalued asset.

Negotiating a Path Forward

When faced with a low appraisal, effective negotiation between buyer and seller is crucial. Open communication among all parties, including real estate agents, is essential to address the issue constructively. Both sides benefit from understanding each other’s motivations and financial constraints.

Compromise often provides a viable solution, with the appraisal gap typically shared. This might involve the seller lowering the price, the buyer bringing additional cash, or a combination. For example, if there is a $10,000 gap, the seller might reduce the price by $5,000 and the buyer covers the remaining $5,000.

Real estate agents play an important role in facilitating negotiations. They provide market insights, advise clients on strategies, and help present proposals. Agents often mediate discussions and work towards a mutually acceptable agreement.

Once an agreement is reached, a formal addendum to the original purchase agreement is necessary. This legal document amends the contract to reflect changes to the price or terms, ensuring all parties are clear on the revised agreement. Adhering to contingency deadlines, typically 7 to 21 days for appraisals, is important.