Homebuyers

Don’t Panic. This is What to Do if You Receive a Low Home Appraisal

You’ve crunched the numbers, found the home, and made what you believe is a fair offer. Then the appraisal comes in and it’s not good news. The value of the home you hope to buy is less than your agreed-upon purchase price.

In a perfect world, the appraisal on the home you hope to buy would come back at or close to your offer. Then you wouldn’t have to renegotiate the purchase price with the seller or pay the difference out of pocket. The reality, however, is that low appraisals do arise. And they’re not necessarily deal-killers.

If you do face a low appraisal, don’t fret. Most buyers have an appraisal contingency in their offers. This means if the home doesn’t appraise for as much as your offer, you can negotiate with the sellers. That means you have options.

“A low appraisal creates a financing gap, but it doesn’t automatically stop the transaction. It usually opens the door to more conversation and a round of negotiation,” said strategic real estate advisor Jeff House of Real Estate Bees in Dayton, OH. “Most buyers and sellers want the deal to proceed, so they naturally look for middle ground.”

Here’s what to do if your home appraisal comes in lower than you anticipated.

1. Renegotiate with the seller after a low home appraisal

If the appraisal for the home you put an offer on comes in lower than expected, the first thing you need to do is renegotiate with the sellers.

You can ask the seller to lower the price. Or if you have additional funds and want to go ahead with the purchase, you may choose to meet in the middle.

Most sellers won’t want the deal to fall apart, except for those in the most competitive markets. Other buyers may think there’s something wrong with the home. If it sits without a buyer for a while, the sellers might need to cut the price.

2. Challenge the low appraisal or request a new one

Another option after a low home appraisal is to request a value reconsideration. You may be able to bring up things that can lead to a higher home valuation.

“If the appraisal report has errors, missing comps, or missed improvements, the buyer’s agent can submit a documented challenge,” said House.

If that isn’t successful, you may also want to ask for a second appraisal. You’ll generally have to pay for this one, though.

Generally, challenging appraisals don’t work, said House. However, he has seen it succeed when paired with clear and relevant supporting evidence, such as a list of upgrades or photos showing unique or high-end features.

3. Pay the difference in cash following a low appraisal

If your heart is set on the home, the sellers won’t come down on the price, and have some cash on hand, you may not want to let a lower-than-expected appraisal derail your homebuying plans. You may choose to cover the appraisal shortfall, which is the difference between the higher contract price and the appraised value of the home.

With this strategy, you essentially take care of the gap out of pocket. Your lender may then finance the rest of the home based on the appraised value.

4. Walk away from the home after a low appraisal

Sometimes, it may be best to walk away from a home with a low appraisal (even if it hurts.) The home may be overpriced. And that could be uncomfortable in the future if you want to sell but can’t recoup what you paid for the property.

Fortunately, buyers with an appraisal contingency in their contracts should be able to withdraw their offers without any financial penalties.

“This does happen, typically when the difference between the market’s view of the home and the appraised value is simply too significant to overcome,” said House.

Unless you’re willing to pay more, it may make sense to look for other homes,

How to prevent a low appraisal on a home

While buyers and sellers can’t always avoid low home appraisals, they may be able to reduce their risk. To do so, work with an experienced real estate agent. Your agent should provide recent comparable sales and key property details to the appraiser before they evaluate the home. This should help support your offer price.

In addition, make sure the seller provides the appraiser with full access to all areas of the property. This includes crawl spaces, attics, and any detached structures. This will help them complete a thorough assessment.

When your offer is in alignment with your local market and the appraiser has a full, accurate picture of the home, your chances of a short appraisal often go down.