What If Appraisal Is Lower Than Offer?

A low appraisal occurs when a professional appraiser determines a property’s market value to be less than the price a buyer and seller have agreed upon in a purchase contract. This situation, often termed an “appraisal gap,” can complicate a real estate transaction, potentially delaying or even halting the sale.

Understanding the Impact of a Low Appraisal

A low appraisal directly impacts the financing of a home purchase. Mortgage lenders base the maximum loan amount on the property’s appraised value or the agreed-upon purchase price, whichever is lower. Lenders require an appraisal to ensure the home’s value justifies the loan amount, protecting their investment in case of borrower default.

When an appraisal comes in lower than the offer, it creates a “financing gap.” Lenders will not finance this gap; consequently, the buyer is responsible for covering this shortfall out-of-pocket. For instance, if a home is under contract for $300,000 but appraises at $280,000, the $20,000 difference becomes an unfunded amount the buyer must manage. This financial hurdle can lead to delays or even the termination of the transaction if a solution isn’t found.

Buyer’s Strategic Responses

When a low appraisal arises, buyers have several strategic responses to consider. One direct approach involves the buyer paying the difference between the appraised value and the purchase price in cash. This option allows the transaction to proceed without renegotiation but requires the buyer to have sufficient liquid assets available.

Alternatively, the buyer can attempt to renegotiate the purchase price with the seller, requesting a reduction to match the appraised value or to meet somewhere in the middle. This negotiation often involves real estate agents facilitating communication between both parties. A seller’s willingness to lower the price can depend on various factors, including market conditions and their motivation to sell.

A buyer may also consider contesting or challenging the appraisal. This process involves submitting a “reconsideration of value” to the lender and appraiser, providing additional comparable sales data or pointing out factual errors in the appraisal report. Successfully challenging an appraisal can be difficult and is not always guaranteed to result in a revised valuation.

The buyer may choose to walk away from the deal. This action is typically protected by an appraisal contingency clause in the purchase agreement. This clause allows the buyer to terminate the contract and receive their earnest money back without penalty if the appraisal comes in low and a resolution cannot be reached. However, if an appraisal contingency is not in place, walking away could result in the forfeiture of earnest money or potential legal action.

Seller’s Strategic Responses

Sellers also have distinct options when faced with a low appraisal. A common response is for the seller to agree to lower the purchase price to match the appraised value. This decision can save the deal and prevent the need to relist the property.

Conversely, a seller has the right to insist on the original agreed-upon price. The buyer then faces the decision of covering the appraisal gap in cash or terminating the contract, potentially leading to the deal falling through. This stance carries the risk of losing the current buyer and having to re-enter the market.

Like buyers, sellers can also contest the appraisal. This involves providing the lender and appraiser with information such as overlooked comparable sales, recent home improvements not fully considered, or factual inaccuracies in the appraisal report.

If negotiations fail and the buyer walks away, the seller’s final recourse is to relist the property for sale. This involves putting the home back on the market, potentially at a revised price based on the recent appraisal or market conditions. Relisting can incur additional time and marketing expenses, and there is no guarantee a new buyer will offer the original price.

Navigating Negotiations and Contractual Protections

Addressing a low appraisal often requires open communication and negotiation between the buyer and seller. Their real estate agents play a crucial role in presenting options, relaying offers and counteroffers, and managing expectations. Discussions aim to bridge the appraisal gap through price adjustments, buyer contributions, or a combination. Successful negotiation relies on both parties being willing to compromise to keep the transaction on track.

A key contractual protection in this scenario is the appraisal contingency clause. This clause allows the buyer to terminate the contract and recover their earnest money if the property appraises for less than the agreed-upon purchase price. The contingency typically specifies a timeline for the appraisal to be completed and for any subsequent negotiations to occur, providing a defined period for resolution.

The possibility of a second appraisal or switching lenders might be discussed. While a lender might consider a reconsideration of value if clear errors or omitted comparable sales are presented, ordering an entirely new appraisal is less common and often requires specific justification. Changing lenders could lead to a different appraisal, but it also introduces delays and new underwriting processes, making it a less straightforward solution.