What Happens if the Appraisal is Lower than the Buyer’s Offer?

The PropertyClub Team
Aug 2nd 2020
A low appraisal is one of many curveballs that you may encounter in the home buying process. You'll need to decide if you should lower your offer and start negotiating with the seller or if you're better off trying to get a second opinion.

So, you set out, found your dream home, and made an offer. Now that appraisal came back lower than the offer that you made. Now what? Essentially, two things can happen. It will either be an opportunity to renegotiate and get a better price, or it can set you back to square one. 

Many things will impact what you decide to do from here, and there will be a lot to be learned and to take into consideration. 

Home Appraisal

A home appraisal takes place when a buyer is seeking a mortgage on a home. This appraisal will assist lenders in determining the home’s true value before they agree to front the money and dish out a loan. The purpose of appraising a home is to reveal whether the price on the contract for the property is appropriate based on the location, condition, and features of the house.

Home appraisals are used for mortgage refinances as well as purchasing a new home. Both become affected if the appraisal comes in lower than the agreed-upon selling price.

Is a Low Appraisal Good for the Buyer?

Having your home appraisal come in low can be a huge challenge and problem. While many view it as a hindrance for the seller, it can be just as disastrous for the buyer, if not more. A low appraisal can also 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. 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. 

Why is the Appraisal Low? 

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. Competition is a key player in real estate and asking prices are vastly influenced by what other homes are listed for and the number of buyers and the number of sellers that are out there at a particular time. It is all about supply and demand. In a market with fewer sellers than there are buyers, all home prices will increase by default. 

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.

What Can You Do if the House Appraised for Less Than the Offer?

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. 

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.

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.

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 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. 

Renegotiating 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 renegotiate 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. 

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.

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. 

Appealing a Low Appraisal

If you do decide to appeal the appraisal you received on the home you are trying to buy, there are a few steps to take to get a second appraisal. 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. Next, you should reach out to your lender to request the appraisal value appeal if you located errors. You will then need to compile comparable sales in the area that recently sold and their details. The comps are a huge part of the appeal process. 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. 

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. Remember: your real estate agent represents you!

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. 

Keep in mind that although having the appraisal come in very low 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.