What to Do if Your Appraisal Comes in Low

A low home appraisal can create significant hurdles in a real estate transaction. This common scenario occurs when an appraiser determines a property’s market value is less than the agreed-upon purchase price. Such a discrepancy can disrupt the financing process and requires careful navigation by both buyers and sellers. This article outlines actionable steps to address this challenge.

Understanding the Implications of a Low Appraisal

A low appraisal occurs when a licensed appraiser determines a property’s estimated value is less than the agreed-upon purchase price. This creates an “appraisal gap.” Mortgage lenders base the maximum loan amount on the appraised value or the purchase price, whichever is lower. If a home appraises for less than the contract price, the lender will only finance up to the lower appraised value. This means the buyer cannot secure a loan large enough to cover the full purchase price as initially agreed. The difference between the contract price and the appraised value becomes a financial concern that must be addressed for the sale to proceed.

Buyer’s Strategic Considerations

When an appraisal comes in low, a buyer faces several decisions and must assess their financial position. One immediate option is to cover the appraisal gap by paying the difference in cash at closing. This requires the buyer to have additional liquid funds beyond their planned down payment and closing costs.

Alternatively, a buyer might seek to renegotiate the purchase price with the seller, aiming for a reduction to match the appraised value or to split the difference. Reviewing the purchase agreement is crucial to understand any appraisal contingency clauses. These clauses allow a buyer to withdraw from the contract without penalty and retain their earnest money if the appraisal is low. Without such a contingency, walking away could result in the forfeiture of the earnest money deposit.

Communicating promptly with their lender is important for the buyer to understand the impact on their loan and explore options like adjusting their down payment strategy. The buyer must weigh their financial capacity against their desire for the specific property, deciding whether to invest more cash, push for a price adjustment, or consider terminating the agreement.

Seller’s Strategic Considerations

Upon receiving news of a low appraisal, a seller must evaluate their options and motivations for the sale. One direct approach is to reduce the sale price to align with the appraised value, which can help keep the transaction on track. The seller could also propose that the buyer cover the entire appraisal gap, or a portion of it, with additional cash.

A seller’s decision may depend on their urgency to sell, current market conditions, and their perception of the home’s true value. If the seller believes the appraisal is inaccurate, they might consider challenging it. Conversely, if market conditions are strong and other interested parties exist, the seller could choose to put the house back on the market, risking a similar outcome with a new buyer.

Understanding the local market and recent comparable sales is important for the seller to make an informed decision regarding price adjustments or relisting. A seller’s willingness to negotiate often hinges on their financial goals and how quickly they need to finalize the sale.

Steps to Challenge an Appraisal

Challenging a low appraisal involves a structured process, typically initiated through the buyer’s lender. The lender will often facilitate a “Reconsideration of Value” (ROV) request to the appraisal management company or directly to the appraiser. This process requires submitting evidence to support a higher valuation.

Key evidence includes recent comparable sales that the appraiser may have overlooked or undervalued. These comparables should be similar in size, age, condition, and location, and sold within a recent timeframe, generally within the last 90 days. Documentation of property features or upgrades not adequately accounted for in the original report, such as a new roof or remodeled kitchen, can also be submitted.

Additionally, identifying factual inaccuracies within the appraisal report itself, such as incorrect square footage, number of rooms, or property characteristics, provides a strong basis for challenge. While a challenge does not guarantee a change in value, providing clear, objective data can prompt the appraiser to review and potentially revise their opinion.

Resolving the Appraisal Gap

Once individual considerations and any appraisal challenges have been explored, buyers and sellers typically engage in negotiations to bridge the appraisal gap. Various strategies can be employed to reach a mutually acceptable resolution. Parties might agree to split the difference, with the buyer paying a portion of the gap in cash and the seller reducing the price by the remainder.

The seller could agree to lower the purchase price entirely to match the appraised value, particularly if they are motivated to close the sale quickly. Conversely, the buyer might decide to pay the entire appraisal gap in cash if they are determined to acquire the property and possess the necessary funds. In some cases, the seller may offer concessions, such as covering a portion of the buyer’s closing costs, instead of a direct price reduction.

Clear and open communication between all parties, including real estate agents and lenders, is important throughout this negotiation phase. Any agreed-upon changes must be formally documented by amending the original purchase agreement. If an agreement cannot be reached, the contract may be terminated, potentially leading to the buyer losing their earnest money if appraisal contingencies were waived, or the seller relisting the property for sale.