When an Appraisal Comes in Low, What Happens Next?

When a property appraisal comes in lower than the agreed-upon purchase price, it creates a “low appraisal” scenario. This means the professional valuation does not support the amount the buyer and seller negotiated. Understanding the implications and potential paths forward is important for both parties.

Implications for Your Real Estate Transaction

A low appraisal directly impacts the financing of a real estate transaction. Mortgage lenders typically base their loan amount on the lesser of the property’s appraised value or the agreed-upon purchase price. If the appraisal is lower than the purchase price, the lender will only approve a mortgage for a percentage of that lower appraised value. This creates a funding gap between the amount the buyer can borrow and the price they agreed to pay.

For instance, if a home is under contract for $400,000 but appraises at $380,000, and the buyer is approved for an 80% loan-to-value mortgage, the lender will only finance 80% of $380,000, which is $304,000. The buyer initially expected to borrow $320,000 (80% of $400,000), leaving a $16,000 shortfall that must be covered. This gap often requires the buyer to bring additional cash to closing, beyond their anticipated down payment and closing costs.

Contractual implications also arise from a low appraisal. Most real estate purchase agreements include an appraisal contingency. This clause allows the buyer to exit the contract without penalty and often recover their earnest money if the property does not appraise for the purchase price. Without a resolution, a low appraisal can halt the transaction, requiring renegotiation or even termination.

Buyer’s Response Strategies

When faced with a low appraisal, a buyer has several strategic options to consider. One common approach involves the buyer covering the difference between the appraised value and the purchase price in cash. This means the buyer must have sufficient liquid funds available to bridge the gap, in addition to their planned down payment and closing costs.

Another strategy is to renegotiate the purchase price with the seller. The buyer can propose lowering the price to match the appraised value or to a point that reduces the funding gap to an acceptable level. This negotiation often requires a mutual agreement to adjust the terms of the original contract.

If the purchase agreement includes an appraisal contingency, the buyer may choose to terminate the contract. This option allows the buyer to walk away from the deal, typically retaining their earnest money deposit, if a satisfactory resolution cannot be reached.

In some cases, a buyer might request a second appraisal, though lenders are not obligated to accept it and the buyer usually bears the expense. This is less common and requires compelling evidence of an error in the initial appraisal.

Seller’s Response Strategies

Sellers also have distinct strategies to navigate a low appraisal. A seller might agree to lower the purchase price to match the appraised value, or to a mutually acceptable figure that allows the transaction to proceed. This decision often depends on market conditions, the seller’s urgency to sell, and the potential for finding another buyer.

Alternatively, a seller could offer concessions to the buyer. These might include credits towards closing costs, a reduction in specific fees, or contributions to repair costs, effectively reducing the buyer’s out-of-pocket expenses without directly lowering the sale price. Such concessions can help bridge the financial gap for the buyer and keep the deal alive.

Some sellers may choose to refuse any price reduction or concessions. This stance carries the risk of the buyer exercising their appraisal contingency and terminating the contract. In such a scenario, the seller would need to relist the property and seek a new buyer, potentially prolonging the sale process.

A seller may also decide to challenge the appraisal by initiating a formal reconsideration of value. This involves providing additional data or pointing out factual errors in the appraisal report to support a higher valuation.

Initiating an Appraisal Reconsideration

Initiating an appraisal reconsideration, often called a Reconsideration of Value (ROV), is a formal process to dispute a low appraisal. Typically, the lender initiates this process on behalf of the buyer, or the seller’s agent can facilitate it by providing information to the lender. The goal is to provide evidence that might lead the appraiser to re-evaluate their initial valuation.

Submitting an ROV requires specific, objective documentation to support a higher valuation. This documentation often includes comparable sales (comps) of similar properties in the immediate area that have recently closed, which the appraiser may have overlooked or undervalued. These comparable sales should be from verifiable sources like the Multiple Listing Service (MLS) or county records, and generally closed within the last 12 months.

Further supporting documentation can highlight factual errors in the appraisal report, such as incorrect square footage, an inaccurate number of bedrooms or bathrooms, or a misrepresentation of the property’s condition or features. Information about significant upgrades or improvements not adequately accounted for in the original report can also be provided. The request must focus on objective facts and data, not subjective opinions.

Once the information is submitted, the lender typically forwards it to the original appraiser for review. The appraiser will then either adjust the appraised value based on the new evidence or provide a detailed explanation for maintaining their original valuation. Usually only one reconsideration is permitted per appraisal.