Have you ever heard of a home “not appraising?” It sounds like the home somehow failed the appraisal. But what it really means is that the value from the appraiser came in lower than the agreed-upon purchase price. And this can create an additional hurdle for buyers and sellers.
So, in this post, we’re going to examine what happens when a home appraisal comes in low. We’ll look at how this impacts buyers and sellers and what your options are.
What a Low Home Appraisal Means for the Buyers
As the buyer, a low appraisal means that you might be offering to pay more than the house is worth. Keep in mind that there is an art to valuing real estate. Many of the factors that determine a unique home’s value are somewhat subjective. So if the appraiser feels that the value is a little lower than the price you offered, you might still be perfectly happy to pay what you offered. Especially if you were competing with other buyers for the house.
And if you’re paying all cash (or making a large down payment of more than 20%), this is probably not a problem at all. You can simply proceed as planned, despite the lower value on the appraisal.
But if you’re getting a home loan for 80% or more of the purchase price, your lender will have an issue with a low appraisal. They won’t want to loan you money to overpay for a house. So in this case, you’ll need to adjust the terms of the deal in one of the following ways:
Increase your down payment to cover the appraisal gap. This means you would cover the difference between the appraised value and the purchase price out of pocket.
Ask the seller to reduce the price to match the appraisal. In a buyer’s market, you might have enough negotiating power to make this work. But in a seller’s market, probably not.
Walk away. If you can’t afford to cover the appraisal gap, and the seller won’t reduce the price, you might be forced to terminate the contract at this point. Most contracts have an appraisal contingency that allows you to cancel without any penalties in this case.
What a Low Home Appraisal Means for the Sellers
As the seller, if the appraisal comes in low, you probably want to wait to see how the buyer reacts before worrying or taking any action.
As we just saw, buyers have options when an appraisal comes in low. And a few of those options (simply proceeding as planned or increasing the down payment to satisfy the lender) won’t impact you at all. You’d still be getting the same price for the house.
But if the buyer asks for a price reduction, you have a decision to make. You can:
Accept the price reduction. You would walk away with less money, but at least you wouldn’t have to start looking for a new buyer.
Decline to reduce the price. You’re not under any obligation to reduce the price to match the appraisal. Just know that declining to reduce the price could mean that the buyer walks away from the deal, and you would have to start the sales process from scratch to find a new buyer. In a hot seller’s market, this might only be a small setback, but in a cool buyer’s market, this could delay your plans by a few months.
There’s One More Option for Buyers and Sellers: Get a Second Opinion
Appraisers are highly trained and well regulated, but because home valuations are somewhat subjective, it is possible that a different appraiser would offer a higher appraised value.
Getting a second opinion would be unnecessary in cases where the buyer is willing and able to cover the appraisal gap in cash. But if that isn’t an option, it’s probably worth getting a second opinion before allowing the deal to fall apart.
Either party (buyers or sellers) can get a second opinion by:
Appealing the results of the original appraisal. If you believe the appraiser had incorrect facts or irrelevant comps, we can ask the appraiser to review the appraisal and reconsider the value. Or
Ordering a second appraisal from a different appraiser. This would simply require a separate appraisal fee to the new appraiser and a few days of wait time until the results are available.
There are no guarantees that a second opinion would provide a different appraised value, but it may be worth exploring if the deal is in danger of falling through.
We’re Here to Help!
Having a home appraisal come in low is just one of the potential complications buyers and sellers can encounter in their real estate transactions. The experts at Sequoia Real Estate are well-trained to handle these complications with as little disruption or stress to our clients as possible. Whether you’re buying or selling, you deserve to be represented by an experienced agent that knows how to navigate the complexities of the real estate market. Contact us for a friendly, no-obligation consultation today!