What Happens When an Appraisal Comes in Lower Than the Offer?

When a property appraisal comes in lower than the agreed-upon offer price, it often introduces an unexpected challenge in a real estate transaction. This situation directly impacts the financing and feasibility of the deal. Understanding the potential implications and available courses of action is important for navigating this common scenario.

Understanding the Appraisal Gap

An “appraisal gap” refers to the difference between the purchase price agreed upon by the buyer and seller, and the property’s appraised value as determined by a professional appraiser. This gap becomes significant because mortgage lenders base their loan-to-value (LTV) calculations on the lower of either the appraised value or the contract price. For example, if a home is under contract for $500,000 but appraises for $480,000, the appraisal gap is $20,000.

Lenders use the appraised value to determine the maximum loan amount they are willing to provide, as it represents their assessment of the property’s market value. If the appraisal comes in lower, the loan amount will be based on this reduced value, potentially leaving the buyer with a shortfall. This means the buyer would need to cover the difference between the lower appraised value and the agreed-upon purchase price out of their own funds. For instance, if a buyer planned a 20% down payment on a $500,000 home ($100,000 down, $400,000 loan), but it appraises at $480,000, the lender would only provide 80% of $480,000, which is $384,000. This requires the buyer to find an additional $16,000 ($400,000 – $384,000) beyond their initial down payment to complete the purchase at the original price.

Buyer’s Options

When an appraisal gap occurs, buyers have several options to consider, each with distinct financial implications and procedural steps. One direct approach is for the buyer to cover the appraisal gap with additional cash. This means the buyer would increase their cash contribution at closing, paying the difference between the appraised value and the agreed-upon purchase price from their personal funds, alongside their planned down payment. This option allows the transaction to proceed without renegotiation, but it requires the buyer to have sufficient liquid assets available.

Another common strategy involves negotiating with the seller to reduce the purchase price. The buyer, through their real estate agent, can formally request that the seller lower the price to match the appraised value or meet somewhere in the middle. This negotiation occurs via an addendum to the original purchase agreement, outlining the new terms and requiring mutual consent from both parties.

Buyers can also attempt to challenge the appraisal report if they believe it contains errors or overlooks relevant comparable sales. This process involves submitting a formal request to the lender, often accompanied by additional comparable property data or specific factual inaccuracies identified in the appraisal. While challenging an appraisal can be a time-sensitive and sometimes difficult process, a successful challenge could result in an adjusted appraisal value, which might bridge or reduce the appraisal gap.

If other options are not viable or desirable, the buyer might choose to walk away from the deal. This decision is facilitated by an appraisal contingency clause in the purchase agreement, which protects the buyer’s earnest money deposit if the property does not appraise for the contract price. Without this contingency, walking away could result in the forfeiture of the earnest money, which is typically a percentage of the purchase price, ranging from 1% to 3%.

Seller’s Options

When a low appraisal impacts a transaction, sellers also have various options to consider, each carrying different risks and potential outcomes. One common choice for a seller is to agree to lower the purchase price to match the appraised value. This decision often aims to keep the deal alive, particularly if the seller is eager to sell the property quickly or if they anticipate similar appraisal issues with other potential buyers. Accepting a lower price reduces the seller’s net proceeds from the sale but avoids the uncertainty and delays of relisting the property.

Conversely, a seller may choose to insist on the original agreed-upon price, refusing to reduce it despite the low appraisal. This stance places the burden entirely on the buyer to either cover the appraisal gap with cash or terminate the contract. Insisting on the original price carries the risk that the buyer may walk away from the deal, especially if an appraisal contingency is in place, forcing the seller to relist the property and potentially face further delays and costs.

Another strategy a seller might employ is to offer a credit or concession to the buyer. Instead of directly reducing the purchase price, the seller could offer a credit toward the buyer’s closing costs, pre-paid expenses, or even a direct cash concession. This approach can help offset some of the buyer’s additional out-of-pocket costs due to the appraisal gap, without formally lowering the property’s sale price, which some sellers might prefer for future valuation purposes.

In some situations, a seller might request a new appraisal, possibly from a different appraiser, if they believe the initial appraisal was inaccurate or flawed. This option is not always available and depends on the lender’s policies and the specific circumstances of the appraisal. Requesting a second appraisal can incur additional costs and introduce delays into the transaction timeline, and there is no guarantee that a subsequent appraisal will yield a higher value.

The Appraisal Contingency

The appraisal contingency clause is an important component within a real estate contract, serving as a protective measure for the buyer. This contractual provision allows the buyer to terminate the purchase agreement and receive their earnest money deposit back if the property’s appraised value comes in below the agreed-upon purchase price. Its purpose is to safeguard the buyer from overpaying and to ensure they can secure financing based on the property’s market value.

The appraisal contingency involves a specified timeframe for the buyer to obtain the appraisal report. If the report indicates a value lower than the contract price, the contingency is triggered. This provides the buyer the opportunity to renegotiate the price with the seller, cover the appraisal gap with cash, or, if an agreement cannot be reached, terminate the contract without financial penalty, such as losing their earnest money.

Buyers sometimes choose to waive the appraisal contingency, especially in competitive real estate markets, to make their offer more attractive to sellers. Waiving this contingency carries risks for the buyer. If the appraisal comes in low after the waiver, the buyer remains obligated to purchase the property at the original contract price, regardless of the appraised value. This means the buyer would be solely responsible for covering any appraisal gap with additional cash, as their loan amount would still be based on the lower appraised value.

The presence or absence of an appraisal contingency directly influences the leverage and choices for both parties when a low appraisal occurs. With a contingency, the buyer has a clear path to renegotiate or exit the deal, which often prompts sellers to be more flexible. Without it, the buyer faces increased financial exposure, while the seller gains more leverage to insist on the original terms.