What to Do If Your Appraisal Comes in Low

When a home appraisal comes in lower than the agreed-upon purchase price, it creates an “appraisal gap,” complicating a real estate transaction. Mortgage lenders base financing on the appraised value, not the contract price. A lower appraisal means the lender won’t approve a loan for the full purchase price, leaving a shortfall. This can be challenging for both the buyer, facing larger out-of-pocket expenses, and the seller, risking the deal falling apart. Understanding available options is crucial to keep the transaction moving forward.

Buyer’s Options

When faced with a low appraisal, a buyer has several paths to consider. One common option is for the buyer to cover the difference between the appraised value and the purchase price in cash. For instance, if a home is under contract for $300,000 but appraises for $290,000, the buyer would need to bring an extra $10,000 in cash. This increases the buyer’s out-of-pocket expense and may require a larger down payment than originally anticipated.

Another avenue for the buyer is to renegotiate the purchase price with the seller. The buyer, often through their real estate agent, can request that the seller reduce the sale price to match the appraised value or meet somewhere in the middle. This approach can be particularly effective if the purchase agreement includes an appraisal contingency, which protects the buyer if the appraisal comes in low. An appraisal contingency allows the buyer to renegotiate the terms or, if an agreement cannot be reached, to withdraw from the deal without losing their earnest money deposit.

If negotiations are unsuccessful and the buyer is unwilling or unable to cover the appraisal gap, walking away from the deal is a viable option, especially with an appraisal contingency in place. Without this contingency, a buyer who walks away might forfeit their earnest money deposit. Buyers should consult their real estate agent and lender to understand their purchase agreement terms and loan implications before deciding.

Seller’s Options

A low appraisal presents the seller with several considerations. One direct option is to reduce the sale price to match the appraised value. This impacts the seller’s net proceeds but can keep the deal on track, especially if the gap is small or the seller is motivated to sell quickly. This approach avoids the transaction falling through and the need to relist the property.

Alternatively, a seller might refuse to reduce the price, which could lead to the buyer covering the difference or the deal collapsing. In a competitive market, sellers may have less incentive to lower their price, especially if they anticipate other offers. However, holding firm carries the risk that the buyer might exercise an appraisal contingency and withdraw, sending the seller back to square one. If the deal falls apart, the seller would need to relist the property.

A seller may also consider initiating or supporting a challenge to the appraisal if there are clear grounds for dispute. While the formal challenge process is typically handled by the buyer’s lender, the seller’s agent can provide supporting data for a higher valuation. Sellers should understand market conditions and contractual obligations, and their real estate agent can offer guidance.

Challenging the Appraisal

Challenging a low appraisal involves a formal process, typically initiated through the buyer’s lender via a “reconsideration of value” (ROV). Valid grounds for a challenge include factual errors in the appraisal report, such as incorrect square footage, a missed bedroom count, or overlooked property features like recent renovations or upgrades. Another basis for an ROV is the appraiser’s use of inappropriate comparable sales, such as properties that are too old, too far away, or not sufficiently similar to the subject property in size, condition, or amenities.

To support a challenge, gather documentation. This includes providing recent comparable sales (comps) the appraiser might have overlooked. Evidence of property improvements, such as receipts for renovations or contractor invoices, can also be supplied if not adequately factored into the original valuation. The aim is to present clear information addressing specific issues or omissions within the appraisal report.

The buyer’s lender typically submits the formal ROV request to the appraisal management company (AMC) or directly to the appraiser. The appraiser reviews the additional information and reconsiders their findings. This process is not guaranteed to result in a revised valuation, as the appraiser may justify their original conclusion. However, if the appraiser finds the new information compelling, they may issue a revised appraisal report with an adjusted value. Only one ROV request is permitted per appraisal report, and it must be completed before the loan closes.

Negotiating the Price Difference

Negotiation between the buyer and seller becomes central once a low appraisal has been received. The goal is to bridge the appraisal gap and find a mutually agreeable solution to keep the transaction alive. Several outcomes are possible: the seller may agree to reduce the sale price to match the appraised value, the buyer may decide to pay the entire difference in cash, or the parties might agree to split the difference. Splitting the difference involves both parties contributing a portion of the appraisal gap.

Effective communication, often facilitated by real estate agents, is important during this phase. Agents can present market data, explain the implications of the low appraisal, and explore various scenarios to reach a resolution. For example, a seller might be more inclined to negotiate if they understand that a new buyer could encounter a similar appraisal issue. The negotiation process may also involve seller concessions, where the seller agrees to cover a portion of the buyer’s closing costs to free up funds for the buyer to cover part of the appraisal gap.

Ultimately, the negotiation hinges on the motivation of both parties and the prevailing market conditions. In a competitive market, buyers might be more willing to cover a larger portion of the gap, while in a slower market, sellers may be more flexible in reducing the price. If no agreement can be reached despite negotiation efforts, the deal may fall through. In such cases, if an appraisal contingency was part of the contract, the buyer can typically walk away without penalty, and both parties can then pursue other opportunities.