What Happens When a Home Appraisal Is Lower Than the Offer?

A home appraisal is an objective, professional assessment conducted by a licensed appraiser to determine a property’s fair market value. This valuation represents the price a willing buyer would pay a willing seller in an open market, assuming both are knowledgeable about relevant facts and neither is under undue pressure. The primary purpose of an appraisal in a real estate transaction is to provide an unbiased estimate of the home’s worth.

This assessment is important for mortgage lenders, as it serves as a security measure. Lenders rely on the appraisal to ensure that the amount they are loaning for a home does not exceed its actual market value. This protects the lender’s investment, as the home itself acts as collateral for the loan.

Understanding the Appraisal Process

A licensed appraiser conducts the home appraisal, typically ordered by the mortgage lender after a purchase agreement has been accepted. The cost of an appraisal, generally ranging from $300 to $550, is usually paid by the borrower.

During the appraisal, the appraiser conducts a thorough inspection of the home’s interior and exterior. They evaluate the property’s condition, size, layout, and features. The appraiser analyzes recent sales of comparable properties, or “comps,” in the same neighborhood or market area. This includes reviewing data from the Multiple Listing Service (MLS) and public records.

Factors considered by an appraiser include the home’s age, location, overall condition, amenities like renovated kitchens or swimming pools, and any significant upgrades. They also assess local market trends and the condition and style of other homes in the surrounding neighborhood. The appraiser generates a detailed report outlining the estimated home value. This report is then sent to the lender, who provides a copy to the borrower.

Buyer’s Responses to a Low Appraisal

When a home appraisal comes in lower than the agreed-upon purchase price, buyers have several options, often guided by the terms of their purchase agreement. One common response is to renegotiate the purchase price with the seller. The buyer can request that the seller lower the price to match the appraised value, helping to align the loan amount with the property’s assessed worth and secure financing.

Alternatively, a buyer might choose to cover the difference between the appraised value and the offer price out of their own funds. This is often referred to as an “appraisal gap” and requires the buyer to increase their down payment. For instance, if a home is offered at $300,000 but appraises at $290,000, the buyer would need to bring an additional $10,000 to closing, beyond their initial down payment.

Another option is to challenge the appraisal by requesting a reconsideration of value from the lender. This involves providing the lender with additional comparable sales data, or “comps,” that the appraiser may have overlooked. While challenging an appraisal can be difficult, it allows the buyer to present a case for a higher value by providing compelling evidence.

If the purchase agreement includes an appraisal contingency, the buyer may have the option to withdraw their offer without losing their earnest money deposit. This contingency allows the buyer to exit the contract if the home does not appraise for the agreed-upon price. Exercising this right involves providing notice to the seller within the contingency period, citing the low appraisal as the reason for termination. This protection prevents the buyer from being obligated to purchase a home for more than its appraised value, which could lead to difficulties securing financing.

Seller’s Responses to a Low Appraisal

When faced with a low appraisal, sellers have several courses of action. One common choice is for the seller to agree to lower the sale price to match the appraised value. This decision often aims to keep the transaction alive, especially if the seller is motivated to sell quickly. Reducing the price can facilitate the buyer’s loan approval and ensure the deal closes.

A seller is not obligated to reduce the price and can reject the buyer’s request. If the buyer is unwilling or unable to cover the appraisal gap, the deal may fall apart. The seller may prefer to risk the current contract terminating rather than selling for a lower price, especially if they believe the appraisal is inaccurate.

In some situations, a seller might consider requesting a second appraisal, though this is less common and costly. This option is pursued if the seller or their agent believes the initial appraisal contained errors. Lenders may be reluctant to order a second appraisal unless a clear error is identified, and the cost would likely fall to either the buyer or the seller.

If an agreement cannot be reached, the seller may choose to terminate the current contract and relist the property. This means the seller will need to find a new buyer, potentially at a price closer to the recent appraisal or one willing to pay the appraisal gap. Relisting can incur additional marketing costs and extend the time the property remains on the market, but it allows the seller to avoid selling at an unacceptable price.

Navigating the Purchase Agreement

The purchase agreement is a key document in any real estate transaction, and its clauses, especially the appraisal contingency, are important when a home appraisal is lower than the offer. An appraisal contingency is a contractual provision that protects the buyer, allowing them to terminate the agreement and receive their earnest money back if the home does not appraise for at least the agreed-upon purchase price.

If an appraisal contingency is present, it specifies the conditions under which the buyer can walk away, including a defined timeframe within which the appraisal must be completed and the results reviewed. Should the appraisal come in low, the buyer must notify the seller of their intent to terminate or renegotiate within this period. Failure to adhere to these timelines can result in the buyer waiving their right to terminate and forfeiting their earnest money deposit.

Conversely, if the purchase agreement does not include an appraisal contingency, the buyer has fewer protections. A low appraisal could still impact the buyer’s ability to secure financing for the full purchase price. Without the contingency, the buyer might be obligated to cover the appraisal gap out of pocket or risk losing their earnest money if they choose to back out. The absence of this clause shifts more risk to the buyer, so understanding the contractual implications before signing is important.

Understanding the specific terms agreed upon in the purchase agreement is important. This includes reviewing clauses related to financing, contingencies, and deadlines. Clear communication and adherence to these contractual obligations are necessary for navigating complexities that arise from a low appraisal, ensuring both parties understand their rights and responsibilities.