What to Do If an Appraisal Comes Back Low?

A home appraisal is a key step in real estate, determining a property’s market value for financing. When an appraisal is lower than the agreed-upon sale price, it creates an “appraisal gap.” This situation impacts both buyers and sellers, requiring strategic responses to keep the transaction on track.

Understanding a Low Appraisal

A home appraisal determines a property’s market value. Lenders require this assessment to ensure the loan amount does not exceed the home’s worth. Mortgage approvals are based on the lower of the appraised value or the purchase price.

Factors contributing to a low appraisal include rapid changes in local market conditions, causing values to shift faster than recent comparable sales data. Appraisers rely on sales of similar homes; a lack of relevant or recent comparable properties can lead to a conservative valuation. Unique property features or errors in the report can also result in a lower assessment.

Buyer’s Actions and Options

When faced with a low appraisal, buyers have several options, often in consultation with their real estate agent and lender. Buyers can renegotiate the purchase price with the seller to match the appraised value.

Buyers can also cover the difference between the appraised value and the sale price in cash. For example, if a home appraises $10,000 below the contract price, the buyer would pay that $10,000 out of pocket. Buyers might also shift funds from a larger down payment to cover this gap.

Buyers can request seller credits or concessions, such as the seller covering a portion of closing costs. This reduces the buyer’s overall cash outlay. If negotiations are unsuccessful and the contract includes an appraisal contingency, the buyer may withdraw from the contract without losing their earnest money deposit.

Seller’s Actions and Options

Sellers face choices when an appraisal is low, depending on market conditions and selling objectives. One approach is to lower the sale price to match the appraised value, which helps keep the transaction moving, especially if the appraisal gap is small or the seller needs to close quickly.

Sellers might also offer concessions, like contributing towards the buyer’s closing costs, to incentivize proceeding with the original purchase price.

A seller could also stand firm on the original price, declining to reduce it or offer concessions. This carries the risk of the buyer withdrawing, especially if an appraisal contingency is in place. If the deal falls through, the seller would need to relist, potentially facing another low appraisal or longer time on the market.

Challenging the Appraisal Report

If a low appraisal is inaccurate, a formal challenge process, known as a Reconsideration of Value (ROV), can be initiated. This process reviews the appraisal analysis and conclusions using additional information. The borrower, often with their real estate agent, gathers supporting documentation for the lender.

Supporting documents can include additional comparable sales not considered in the initial appraisal, especially recent and highly similar properties. These must come from verifiable sources like MLS or county records. The challenge can also highlight factual errors or inconsistencies in the report, such as incorrect square footage, room counts, or missed property improvements.

The ROV request is submitted to the mortgage lender, not directly to the appraiser. The lender reviews the information and determines whether to submit the ROV request. Lenders communicate their expected timeframe for a response, ranging from a few days to a few weeks. The ROV process must be completed before the loan closes, as requests submitted after closing will not be considered.

Alternatives for Moving Forward

If negotiations or a challenge to the appraisal report do not resolve the appraisal gap, other avenues can be explored. One possibility is to investigate alternative financing options, such as switching to a loan program with different down payment requirements to free up cash for the shortfall.

Seeking a second appraisal might be considered, though this depends on lender policies and contract terms. Lenders are not obligated to order a second appraisal; if they do, they must select the most accurate valuation. A second appraisal may be required only if the first is deemed flawed.

As a final recourse, both parties may mutually agree to terminate the contract. This allows the buyer to walk away, often with their earnest money deposit returned if an appraisal contingency was included. This provides a defined end when other solutions prove unworkable.