Home appraisals are used for mortgage refinances as well as for purchasing a new home. Their purpose is to reveal whether the price on the contract for the property is appropriate based on the location, condition, and features of the house. But having the appraisal comes in lower than the agreed-upon selling price can be a headache.
Table of Contents
What Happens If a House Doesn't Appraise for the Purchase Price?
Why Is the Appraisal Lower Than the Purchase Price?
What Can You Do If the House Appraised for Less Than the Offer?
How to Appeal a Low Appraisal
Should You Ever Pay More Than the Appraised Value for a Home?
Is a Low Appraisal Good for the Buyer?
What Happens If Appraisal Is Lower Than Offer Bottom Line
What Happens If a House Doesn't Appraise for the Purchase Price?
If an appraisal is lower than the offer, you'll either have to renegotiate and get a better price, appeal the appraisal, offer a higher down payment, or go back to square one and look for another house. In most cases, the seller will be willing to renegotiate the price after a low appraisal, but if they're not you'll need to consider your options.
If you still want the house and you have the funds, you can simply cover the difference between the appraisal and selling price by putting more money down.
Why Is the Appraisal Lower Than the Purchase Price?
Appraisals involve subjective judgments based on factors like location, condition, and comparable sales. Differences in opinion between the appraiser and the buyer/seller about these factors can result in a lower appraisal value. Apart from that, if the property is in poor condition or requires significant repairs, the appraiser may assign a lower value to account for these factors. Alternatively, the property could simply be overpriced, leading to a discrepancy between the listing price and the appraised value.
Real estate comparable sales, or comps, come into play when appraising a home. However, usually “historical” sales are more relevant when it comes to an appraiser putting a value on a home. Sometimes, for this reason, if an appraisal comes back on the lower end, it indicates that the market is very competitive at the moment.
It should be noted that on some occasions, an appraisal will come back low due to the person conducting the appraisal. As with all things, the person conducting a job or task has a job to fulfill and may not always do an accurate or complete job. In other cases, each person has their own judgment and opinion, which may lead to bias or an error.
If you're wondering what hurts a home appraisal, the truth is that many things come into play when it comes to appraisals, as different factors may influence the process.
What if the Appraisal Is Wrong?
In the event that an appraisal is speculated to be wrong, appraisal disputes can be files, and a new one can be requested. Data and comparable sales will need to be provided to back this claim. Here are some of your options if the appraisal is lower than the buyer’s offer.
What Can You Do If the House Appraised for Less Than the Offer?
- Get a Second Opinion
- Increase the Downpayment
- Make Up the Difference in Cash
- Renegotiate the Purchase Price
- Take on a Second Mortgage
- Cancel the Sale
1. Get a Second Opinion
Often, the buyer will be able to work with their mortgage lender to have a second appraisal conducted. It may extend some deadlines and push back closing, but if the second appraisal comes back higher, it will be worth the second opinion. A home appraisal costs $425 on average, so it's relatively affordable to get a second opinion.
2. Increase the Downpayment
If the seller will not budge off of their price, increasing your downpayment will sometimes save you from paying private mortgage insurance (PMI), which will hopefully cover the difference in appraisal value and sale price.
3. Make Up the Difference in Cash
One route the buying and selling parties take when an appraisal comes back lower than the offer price is for the buyer of the property to make up the difference between the sale price and appraisal in cash. Lenders will only lend an amount up to what the home appraises for. This is because if the individual to whom they lent to defaults on the mortgage, the lender becomes responsible for the home. Lenders do not want to be responsible for a property for more than the home is worth.
4. Renegotiate the Purchase Price
In many cases, a seller may realize that it will be tough to find a buyer to purchase a home for more than it is appraising for, and might be willing to renegotiate the selling price with you. There’s quite a bit of paperwork involved, but it can be accomplished. However, sometimes when you get a low appraisal the seller won’t budge on their price. This commonly happens if the seller is being advised by their agent not to be concerned about finding another buyer at the price they are asking due to the market being competitive, they may be confident and not want to budge off their asking price.
Having both real estate agents involved in the deal compile a list of all of the recent comparable sales can help justify either the asking price or the renegotiated price and appraisal.
Keep in mind that many factors will come into play when it comes to whether or not a seller is willing to come down in price. It will depend on how eager they are to sell the home and how likely they think it will be that they will find a buyer willing to pay the price they are looking for.
Sometimes, if the seller is unwilling to budge and come down to the lower appraisal number, they may meet you in the middle, leaving you with a lot less cash to come forward with if you decide to pay the difference.
5. Take on a Second Mortgage
In some events, it is not unheard of for someone to take on a second mortgage to make up for the difference between the appraisal price and the sale price. This is usually a last resort option.
6. Cancel the Sale
Most contracts for the purchase of a home come along with a loan contingency. This means that the buyer attempting to secure the home will not be able to qualify with a lender at the terms that were agreed upon if the home’s appraisal comes back too low. This contingency allows the potential buyer to back out of the deal and cancel the contract and receive their earnest money deposit back.
How to Appeal a Low Appraisal
- Examine the Appraisal For Mistakes
- Make Sure Home Upgrades are Accounted For
- Find Comparable Sales
- Contact Your Lender
1. Examine the Appraisal for Mistakes
Your first course of action will be to obtain a copy go the low home appraisal. You most likely already have it in your possession, but a hard copy is important. Ensure that you look over each detail of the appraisal because even just a small and simple error could make significant changes in the appraisal number.
2. Make Sure Home Upgrades Are Accounted For
Check to make sure that all upgrades and additions that you have made to the property recently are present on the appraisal and that you have all permits for the improvements you made. If an addition is not permitted, it cannot be totaled into the home value, causing a big problem. If you do have permits and the appraiser was unable to find and pull them, you can do some leg work yourself by heading to your city or county government office. Having your realtor meet with the appraisal to point out upgrades and additions that do not seem to be present is a good idea as well.
3. Find Comparable Sales
You will then need to compile comparable sales in the area that recently sold and their details. You will most likely rely on your realtor slightly for assistance with pulling all of this information together, mainly because the market is ever-changing and dynamic, and they will have extensive experience finding comps.
4. Contact Your Lender
Finally, you should reach out to your lender to request the appraisal value appeal. You should point out any errors you may have come across and provide all the details you can. Comps are also a huge part of the appeal process, so be sure to have those ready as well.
Should You Ever Pay More Than the Appraised Value for a Home?
While paying over appraised value certainly isn’t ideal, there are situations when it’s warranted. Appraisals aren’t a perfect science, and they can come in low, but the hope is always that the seller will budget on price or that you’ll get a second appraisal. If the seller is unwilling to negotiate, you’ll want to be sure that paying above appraised value won’t negatively impact you so be sure to perform some additional due diligence before making a decision.
Is a Low Appraisal Good for the Buyer?
Yes, a lower appraisal can be good for the buyer if the seller lowers the price to match the appraisal. However, a low appraisal can also be bad for the buyer. Lenders typically use the appraised value of the property to determine the maximum loan amount they're willing to provide. If the appraisal comes in low, the buyer may need to make up the difference in cash or renegotiate the terms of the loan.
A low appraisal can be a blessing, steering you away from making a big mistake and overpaying. Nobody wants to put money into something and wind up paying more than it is worth. But, if you purchase a home for more than it appraises, you may lose money if you choose to resell it, and that will not be profitable.
For investors and those buying properties to fix up and flip, a lower appraisal is a huge indication that there is no money to be made on this home. This can signify that the asking price is not justified and allows you to renegotiate or back out.
What Happens If Appraisal Is Lower Than Offer Bottom Line
Appraisals can end up being lower than the offer for a variety of reasons. The selling price could be overpriced, the property could be in poor condition, or simply could be attributed to real estate market fluctuations. Although having the appraisal come in lower than the offer is stressful and scary, there is no need to panic because there are many options and routes to take to try and rectify the situation.
You'll need to do a bit more work to sort the low appraisal out, but you can still resolve it and purchase the home.