What to Do If an Appraisal Comes in Lower Than the Offer

A home appraisal can come in lower than the agreed-upon offer price in a real estate transaction. This creates a hurdle for both buyers and sellers, impacting the sale’s progress. Understanding the implications and potential actions is important for navigating this challenge.

Understanding the Financial Impact

Mortgage lenders base the maximum loan amount on the lower of the property’s appraised value or the purchase price. This protects the lender from extending more credit than the property is worth. For example, if a home is offered at $400,000 but appraises for $375,000, the lender will base the loan on the $375,000 appraised value.

The difference between the agreed-upon purchase price and the lower appraised value is called an “appraisal gap” or “financing gap.” This gap is the amount the lender will not finance. If the buyer wants to proceed with the original offer, they must cover this difference out-of-pocket, in addition to their planned down payment.

Many purchase agreements include an “appraisal contingency” clause. This clause protects the buyer by allowing them to renegotiate the sale price or withdraw from the contract without losing their earnest money deposit if the appraisal is lower than the purchase price. Without this contingency, a buyer remains obligated to purchase the home, risking their earnest money if they cannot secure financing and back out.

Buyer’s Courses of Action

When faced with a low appraisal, a buyer has several options. One common approach is to negotiate the price down, requesting the seller reduce the sale price to the appraised value. An appraisal contingency provides significant leverage, allowing the buyer to walk away if the seller does not agree to a price reduction.

Another option is for the buyer to cover the appraisal gap with cash. This means the buyer brings extra funds to closing to make up the difference between the appraised value and the original offer price. This allows the transaction to proceed, but it requires the buyer to have sufficient funds beyond their planned down payment.

Buyers and sellers might also negotiate a compromise, agreeing to split the appraisal gap. For instance, if there is a $20,000 gap, they might agree for the seller to reduce the price by $10,000 and the buyer to bring an additional $10,000 to closing. This shared solution can help keep the deal alive while distributing the financial impact.

If the appraisal contingency is in place and negotiations are unsuccessful, the buyer can choose to walk away from the deal. This allows the buyer to legally withdraw from the purchase agreement and recover their earnest money deposit. This option provides a safeguard against overpaying or being unable to secure adequate financing.

Seller’s Potential Responses

Upon learning of a low appraisal, the seller also has several responses. One straightforward option is for the seller to agree to lower the sale price to the appraised value. This decision is often made to keep the deal moving forward, especially if the seller is motivated to sell quickly or if market conditions make finding another buyer at the original price challenging.

Alternatively, a seller might counter the buyer’s request by proposing a different compromise. This could involve meeting the buyer partway on the appraisal gap, suggesting a reduction less than the full gap but still bridging some of the difference. For example, if the buyer requests a $20,000 price drop, the seller might offer a $10,000 reduction.

The seller also maintains the right to refuse to lower the price and hold firm on the original offer. If the seller takes this stance, the deal may fall through, particularly if the buyer relies on an appraisal contingency and lacks the cash to cover the gap. In such a case, the seller would need to relist the property, incurring additional time and marketing expenses.

In rare instances, a seller might assist the buyer in seeking an alternative lender. A different lender might have different underwriting guidelines or be willing to order their own appraisal, potentially leading to a more favorable outcome. This option is explored when both parties are highly motivated to close the transaction.

Reviewing and Contesting the Appraisal

When an appraisal comes in low, thoroughly review the appraisal report. Buyers and their agents should examine the report for factual errors, such as incorrect square footage, miscounted rooms, or misrepresentation of the property’s features. They should also look for missed comparable sales, particularly recent sales of similar homes in the immediate vicinity not included in the appraiser’s analysis.

If errors or omissions are found, the buyer’s lender can initiate a Reconsideration of Value (ROV) with the appraiser. This formal process involves submitting specific documentation and arguments to challenge the original valuation. The appraiser then reviews the new information and may revise their appraisal.

Providing strong supporting evidence is important for a successful ROV. This evidence might include details of recent comparable sales that closed after the appraiser’s effective date or were overlooked, especially if highly similar and in close proximity. Documentation of significant property improvements not adequately accounted for in the initial report, such as a new roof, updated kitchen, or finished basement, can also bolster the challenge.

While challenging an appraisal is possible, success is not guaranteed and requires objective, compelling evidence. Appraisers are independent professionals and will only adjust their valuation if presented with clear factual inaccuracies or relevant missing data that impacts their methodology. In some cases, if the ROV is unsuccessful or if the buyer seeks a new lender, a second appraisal might be ordered.