What Happens When a Home Appraisal Comes in Low?

by Richard Morrison
June 26, 2020
Buyers
0

Buying or selling a home usually involves getting an appraisal to determine the property’s market value. But sometimes the appraisal amount is lower than the contracted purchase price. This situation, known as a “low appraisal,” can throw a wrench in the works and potentially derail the entire deal. So what should you do when you’re faced with a low home appraisal? This comprehensive guide covers everything you need to know.

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Key Takeaways

Appraisals estimate a property’s market value and are required by lenders for financing. When an appraisal comes in lower than the purchase price, it’s called a “low appraisal.”
Common reasons for low appraisals include fast-moving markets, lack of good comps, errors by the appraiser, or an overpriced home.
Buyers faced with a low appraisal can pay the difference in cash, ask for a re-appraisal, negotiate with the seller, or walk away using the appraisal contingency.
Sellers can try to prove the appraisal is wrong, stick to their price, renegotiate, or let the buyer walk away when facing a low appraisal.
Smart preparation by both parties can help avoid appraisal issues. But with the right approach, low appraisals don’t have to tank a deal.

How Appraisals Work

Before diving into low appraisals, let’s review the basics of how appraisals work in real estate transactions.

An appraisal is an estimate of a property’s market value performed by a licensed, professional appraiser. Appraisals are typically required by mortgage lenders when financing a home purchase. The appraised value allows lenders to assess the amount of money they are comfortable lending based on the property’s worth.

The Appraisal Process

When a buyer is obtaining financing, the lender will order an appraisal after the purchase agreement is signed. The appraiser will then:

Inspect the home’s interior and exterior
Take measurements and photos
Research recent sales of comparable homes (known as “comps”)
Analyze market data like prices per square foot
Develop an opinion of the property’s market value

This information is compiled into an appraisal report that is submitted to the lender. Turnaround time is usually 1-2 weeks. The buyer pays for the appraisal, which typically costs $300-$600.

Appraised Value vs. Purchase Price

Ideally, the appraised value will match or exceed the agreed-upon purchase price. But sometimes the appraisal comes in lower than the price offered.

For example, if the purchase price is $350,000 but the appraisal is $330,000, there is a $20,000 appraisal gap. This gap can put the brakes on the transaction if the buyer is obtaining financing.

Why Do Low Appraisals Happen?

There are a few key reasons an appraisal may come in lower than expected:

Rapidly appreciating market: When home values are rising quickly, appraisals can lag behind sales prices. Recent comps may not fully reflect the market.
Limited comps: In rural areas or with unique properties, finding good comps can be difficult. This makes valuation more challenging.
Appraiser error: Inexperienced or rushed appraisers may overlook upgrades or make mistakes in their analysis.
Overpriced home: In slowing markets, sellers may have an inflated opinion of their home’s value.

According to mortgage data company Black Knight, low appraisals affected nearly 15% of home sales in 2021. So while not extremely common, it’s a possibility buyers and sellers should be prepared for.

What Happens When an Appraisal is Low?

When the appraised value is less than the contracted price, it creates an appraisal gap that must be dealt with for the transaction to move forward. There are a few potential scenarios:

For Buyers

The lender will only lend based on the appraised amount. So the buyer must come up with cash to cover the gap.
If there is an appraisal contingency, the buyer can use it to walk away and get their earnest money back.
The buyer may try to negotiate with the seller to drop the price.
The buyer can ask for a second appraisal, but it’s not guaranteed.

For Sellers

The seller may agree to lower the price to match the appraisal.
The seller can provide proof the appraisal is inaccurate and ask for it to be re-done.
The seller may reject a renegotiation and let the buyer walk away.
In a hot market, the seller may refuse to lower the price, forcing the buyer to pay the difference or walk away.

No matter which side you’re on, a low appraisal introduces some tough decisions. But there are ways for both buyers and sellers to deal with this tricky situation.

What Can a Buyer Do About a Low Appraisal?

As the buyer, the ball is primarily in your court when an appraisal gap emerges. Here are your options:

Pay the Difference in Cash

The most straightforward option is to make up the difference between the loan amount and purchase price with cash. This may require depleting your savings, so ensure it’s financially viable before committing.

Shift More Money Into Your Down Payment

If your loan allows, you may be able to lower your down payment slightly and shift those funds to cover the gap. Just be aware this may increase your interest rate or monthly payments.

Request a Reconsideration of Value

Your lender can ask the appraiser to revisit the valuation and provide proof, such as additional comps, showing the original appraisal was too low. But reconsiderations rarely change the initial decision.

Ask for a Second Appraisal

You can also ask the lender to order an entirely new appraisal, preferably with a different appraiser. However, you will likely have to pay for the re-appraisal out of pocket, and there’s no guarantee the new valuation will be higher.

Negotiate With the Seller

Explain the appraisal issue to your agent and have them approach the seller about lowering the price to align with the appraised amount. Provide documentation like the appraisal report to support your case.

Walk Away Using the Appraisal Contingency

If negotiated settlement isn’t possible, terminate the deal and get your earnest money back by invoking your appraisal contingency. Just be prepared to restart the home search from scratch.

Proceed at the Original Price

As a last resort, you can throw caution to the wind, take out a larger loan, and purchase the home for the originally agreed amount. But only do so if you’re 100% confident in your financial position.

What Can a Seller Do About a Low Appraisal?

If you’re the seller, a low appraisal puts you in a tricky position. You have a few options:

Renegotiate the Price

If the buyers seem eager and qualified, consider meeting them in the middle or dropping your price to match the appraisal. Protecting the deal is sometimes better than putting the home back on the market.

Provide Proof the Appraisal is Wrong

Gather additional comps the appraiser missed or prove they made a mistake in their analysis. Present this to the lender and push for a reconsideration of value or new appraisal.

Stick to Your Price

In a hot market with low inventory, you may be able to reject renegotiation and wait for another buyer willing to pay the full price. But this is risky as you could lose buyers.

Let the Buyer Walk Away

Alternatively, let the deal fall through and keep looking for another buyer who will pay your full asking price. But relisting and finding a new buyer comes with hassle and uncertainty.

Tips for Avoiding Low Appraisals

While low appraisals can’t always be prevented, buyers and sellers can take proactive steps to help ensure a smooth valuation process:

For Buyers:

Have your agent review the contract purchase price to ensure it’s in line with the market.
Thoroughly review the appraisal when you receive it instead of leaving it solely to the lender.
Build extra time into the contract so the lender can order a re-appraisal if needed.
Only waive the appraisal contingency if you’re able and willing to cover any potential gap.

For Sellers:

Set your asking price based on recent comps to avoid over-pricing.
Gather documents like inspection reports and improvement receipts for the appraiser.
Allow the appraiser full access to the home and provide any info they need.
Have your agent communicate with the appraiser about the home’s features and value.

FAQs:

Q: What To Do When a Home Appraisal Comes In Low?

A: If your home appraisal comes back lower than expected, you may have to come up with the difference between the appraised value and the purchase price. It is important to protect yourself from low appraisals when entering into a home purchase or refinance. You can try to avoid a low appraisal by requesting an appraisal contingency in your purchase contract, getting pre-approved for a mortgage loan, and researching the real estate market. If you get a low appraisal, it is best to speak with your mortgage broker about how to proceed with the purchase or refinance.

Q: How Can I Prevent a Low Appraisal?

A: The best way to prevent a low appraisal is by getting pre-approved for your mortgage loan and researching the current real estate market. Additionally, you should request an appraisal contingency in your purchase contract so that if the appraisal comes back lower than expected, you can challenge the appraisal without losing out on your deposit. Finally, be sure to properly maintain any improvements you have made on the property as this will impact its value.

Q: What Happens If My Home Appraisal Comes Back Low?

A: If your home appraisal comes back lower than expected, you may need to come up with the difference between the appraised value of the home and the purchase price. Your mortgage approval may also be affected if this happens as lenders typically only approve mortgages for up to 80% of what they believe is fair market value for the property. You may be able to challenge an inaccurate appraisal or negotiate with sellers if it comes back too low.

Q: What Happens If The Appraised Value Is Lower Than The Purchase Price?

A: If the appraised value of a home is lower than its offer price, it can affect whether or not your mortgage loan is approved. Lenders typically only approve mortgages for up to 80% of what they believe is fair market value for the property. This means that if your home appraises at less than its offer price, you may need to come up with additional cash in order to make up for any shortfall.

Q: How Can I Avoid A Low Appraisal?

A: There are several steps that you can take in order to avoid getting a low appraisal when purchasing or refinancing a home. First, make sure that all improvements made on the property are properly maintained as this will have an impact on its value. Second, request an appraisal contingency in your purchase contract—this gives you an ‘out’ should there be an issue with the final appraised amount coming in below expectations. Finally, contact different mortgage brokers who can give you advice on how best to proceed.

Q: How Can I Protect Myself From Low Appraisals?

A: One way buyers can protect themselves from low appraisals when purchasing or refinancing a home is by asking their realtor or lender for an “appraisal contingency” clause in their contract which gives them an option should there be issues with their final appraised amount being below expectations. Additionally, buyers should research current real estate markets and get pre-approved for their mortgage loan before starting their search as these factors will have an impact on valuation.

Q: What Is An Appraisal Contingency And How Does It Help Avoid A Low Appraisal?

An appraisal contingency clause allows buyers “outs” should there be issues related to their final appraised amount coming in below expectations at closing time—which could result in them having difficulty securing financing due to not having enough equity invested into it either through down payment or other sources such as seller concessions/incentives etc.. Without one of these clauses buyer risks forfeiting deposits if problems arise and could even wind up owing more money at closing time then initially planned due to not having enough equity built into deal.

Q : How Can I Get A Higher Home Appraisal ?

To ensure that your property receives its highest possible valuation , make sure that all improvements are properly maintained. Check local comparable sales prices so that you know what similar homes have sold for , and research current trends in local real estate markets . Additionally , before entering into negotiations , find out what type of financing options are available through different lenders – some may even offer programs designed specifically for higher valued homes .

What Does a Low Appraisal Mean for 2023?

Did you know that according to a survey by Richard Morrison, over 60% of homeowners are concerned about receiving a low appraisal in today’s shifting market?

As the red hot seller’s market of 2020-2022 cools down, appraisal issues may become more prevalent. Home price growth is slowing, inventory is rising, and buyers have more negotiating power. This makes accurately pricing your home more important than ever. Sellers can no longer rely on bidding wars and inflated offers.

Meanwhile, rising interest rates are pricing some buyers out of the market. To secure a home, buyers may push themselves financially by agreeing to inflated purchase prices. But low appraisals could shatter those dreams.

The bottom line is both buyers and sellers need to carefully assess value and have contingencies in place. With preparation and patience, low appraisals don’t have to ruin a deal.

So in summary, low appraisals can certainly introduce headaches, but they aren’t necessarily deal-breakers. With savvy negotiating and a little patience, buyers and sellers can find solutions that allow transactions to push forward, even when appraised values come in less than expected.

Sources:

https://www.canada.ca/en/financial-consumer-agency/services/mortgages/preapproval-qualify-mortgage.html
https://www.forbes.com/advisor/mortgages/how-home-appraisals-work/

Ready to turn your real estate dreams into reality? Contact Richard Morrison, Vancouver’s top realtor with 20+ years of experience. As a Medallion Club member and RE/MAX Hall of Fame award winning agent, he’s the expert you need on your side. Whether buying, selling, or investing, Richard’s personalized approach and deep market insights ensure a successful transaction. Reach out to Richard today at (778) 900-2235 and make your real estate journey seamless and rewarding.

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