An appraisal that’s lower than expected doesn’t have to kill the deal
A low appraisal value doesn’t mean the end of your home buying or selling dreams—you still have options.
Some home improvements can offer significant returns on investment to raise your property value.
You can solicit a second professional opinion if you believe the original appraisal is inaccurate.
Lower-than-expected home appraisals can seem like a nightmare for sellers and buyers alike. Fortunately, getting your appraisal back with a less-than-hoped-for figure doesn’t mean your dream of buying, selling, or refinancing has to go on the back burner. Let’s take a look at what happens if the appraisal is lower than the offer and what to do as the buyer and seller.
An appraisal gap is a gap between the appraised value of a home and the agreed upon offer price. The gap can either result in the appraised value coming in above the offer price—in which case the seller may try to negotiate the sale price higher—or it could come in below the offer price—in which case the buyer may need to come up with additional funds to bridge the gap and maintain funding from a mortgage company.
The offer price comes from the negotiations between the buyer and seller, and it’s what ultimately determines the real-world value of the property. The appraised value comes from a local real estate appraiser, who works as an objective third party and reviews your property before coming up with their professional opinion of value.
A low appraisal happens when the appraiser assigns the property a value that’s lower than the agreed-upon offer price. Since mortgage lenders will not provide a loan too far above the home’s appraised value—it typically cannot go above 80% of the appraised value—a low appraisal limits the amount buyers can finance from the lender.
A low appraisal can occur for several reasons, and it’s most common during a competitive real estate market when high demand drives up property values above what an appraiser will determine is accurate.
A professional who does home appraisals will use two key factors to determine value: the local market and the status of the property. If comparable homes in the area sold for lower than what you’re offering on a home, you’ll likely end up with a low appraisal. Similarly, if the property you’re buying is in poor condition or needs major renovations to make it habitable and maximize value, the appraisal could come in lower than you expect.
There are many related things appraisers look for that can result in a low appraisal, including the following:
Fewer bedrooms and bathrooms than is common in the area
An unusually small or unusable plot of land
A lack of square footage
Structural damage
Health and safety issues, like mold or asbestos
Proximity to commercial or industrial real estate
Close proximity to railroad tracks, major roads, or airports
Many other issues related to condition and location
Although a lower-than-expected appraisal doesn’t spell disaster for home buyers, it throws a serious wrench in the planning process. Check out these strategies for handling a low home appraisal as a potential buyer.
If the appraised value of your potential new home is lower than anticipated, you have the opportunity to negotiate with the seller for a lower purchase price. Talk with the seller about what they can do to match the appraised value of their home in order for the sale to continue. Some may accept a lower offer, while others might agree to make repairs or improvements to help bridge the appraisal gap.
Before taking this route, consult your real estate agent about handling the negotiations. You can use the low appraisal as leverage to lower the purchase price, but keep in mind that the seller may just move to another offer at the same or similar price if another buyer can make the offer work because of a larger down payment. Your strategy should depend on the market.
While not all lenders will allow a second appraisal, it never hurts to ask. Check with your lender and see if another appraiser could evaluate the property to ensure the first opinion was accurate. If they come to the same conclusion in the second appraisal report, it’s fair to assume that the value is accurate, even if it’s disappointing. However, if they appraise the home higher, you may be able to regain some of the ground lost with that first appraisal.
If you kept the appraisal contingency in your purchase agreement, you have the option to back out of the sale without losing your earnest money deposit. This type of contingency protects the buyer during low appraisal situations so that you can walk away from the sale without losing money. Some home buyers may still want to buy the home despite the low appraised value, but it’s helpful to have the option if needed.
Another option is for home buyers to close the appraisal gap by bringing additional cash to the closing table to make up the price difference. This is a risky move for buyers since it means overpaying the estimated fair market value of the home. This scenario is not typically ideal for buyers because they’ll have to pay out-of-pocket in addition to securing the mortgage, and they’ll receive less equity for the money. Still, highly motivated buyers may be willing to pursue this option.
A low home appraisal may seem like a blow to a home seller, but there are a few ways to increase your home’s value or avoid a low appraisal altogether. Check out these tips for potential strategies.
If you’re hoping to raise your home value for a sale or refinance, consider making some improvements that will provide a major return on your investment (ROI).
You can often get a good idea of where to focus your efforts by looking at the appraisal report to see why the appraiser adjusted your value down. You can also focus on projects that maximize return on investment (ROI) and bump up appraised value, including the following:
Renovating your kitchen: Estimated 72% ROI
Replacing a garage door: Estimated 94% ROI
Updating your home’s exterior: Estimated 92% ROI
Replace your windows: Estimated 68% ROI
If the appraisal came in lower than your asking price, things could get sticky for the buyer and the seller. Depending on how much you need to clear in order to pay off your existing mortgage, you may want to consider accepting a lower sale price to meet the updated home value. Speak with your agent about options and what’s best in your particular situation.
Of course, there’s always the chance that the appraised value will come in higher than the offer price. If you’re a buyer in this situation, you should celebrate, as you’re getting the home below the fair market value, and you should have instant equity.
If you’re a seller, you may want to consider negotiating a higher sale price. Keep in mind that you may not have recourse to do so if you have accepted an offer already and the signed agreement doesn’t have an appraisal contingency. As your attorney or your agent what the best course of action is to get the most value for your property.
No, the appraisal value comes from an appraiser and is a professional opinion of value based on property location and condition, while the market value is determined solely by what buyers are willing to pay for your home. Lenders normally use appraised values to ensure they’re staying within target loan-to-value (LTV) ratios—the market value is simply what the home sells for. Appraised value can sit above or below market value.
In cases where an appraisal comes in lower than an offer price, sellers might opt to lower their asking price to meet the appraisal, especially if the market is slow, and replacing the offer with a higher one may take a long time. Sellers can also offer to make repairs to boost the appraised value, hire another appraiser to get a second opinion, or just move on to another offer that isn’t contingent on the buyer getting a mortgage or an appraisal inspection.
If the appraised value comes in lower than an offer, a buyer will normally be able to back out because a low appraisal can prevent a mortgage from going to underwriting. The buyer can also try to negotiate for a lower sale price or offer to put down more cash to bridge the appraisal gap.
