What You Need to Know About Appraisals
You’ve accepted an offer and the sale is moving forward—then the appraisal comes in lower than the purchase price. It’s easy to interpret that as a verdict on what your home is “really worth.” But the contract price and the appraised value aren’t actually answering precisely the same question. One tells us what this buyer agreed to pay. The other is an independent opinion of value prepared for a particular purpose, often the buyer’s financing. If those numbers don’t match, the important question becomes what the difference actually changes.
According to the National Association of REALTORS®, appraisal issues continue to be one reason some real estate closings are delayed. That makes the appraisal worth understanding before a problem ever arises. A low appraisal doesn’t automatically mean the sale is in trouble, but if the buyer is relying on financing, it can change how much the lender is willing to finance. From there, the contract and the decisions made by the buyer and seller determine what happens next.
WHAT IS AN APPRAISAL?
An appraisal is a professional opinion of a property’s value supported by market data and analysis. Depending on the assignment, the appraiser may consider location, condition, size, features, improvements, relevant comparable sales, and other information appropriate to the valuation. The important word there is “opinion.” It’s a professional opinion supported by evidence—not simply a formula that produces an indisputable number.
An appraisal is different from a Comparative Market Analysis (CMA). A CMA is generally prepared by a real estate professional to help evaluate a property’s position in the market and develop a pricing strategy. An appraisal is performed by an independent credentialed appraiser for a specific valuation purpose, often in connection with financing. Both may examine market evidence, but they’re using it for different purposes.
WHY IS AN APPRAISAL NEEDED?
When a buyer is financing a purchase, the lender may require an appraisal or another acceptable valuation method because the property will serve as collateral for the loan. The lender therefore has its own question to answer: does the property’s value adequately support the financing being requested?
That distinction matters to a seller. The appraisal isn’t primarily being conducted to determine whether you priced the property correctly or whether the buyer made a good offer. It’s part of the lender’s evaluation of the loan. The buyer generally receives the appraisal or other written valuation in many first-lien mortgage transactions because it’s being obtained through that lending process.
If the buyer is paying cash, there is no mortgage lender requiring a valuation. The buyer may still choose to obtain an independent appraisal or make the purchase subject to another form of valuation if the contract allows it.
WHAT IF THE APPRAISAL DOESN’T MATCH THE PURCHASE PRICE?
Suppose you list a home, several buyers are interested, and one agrees to pay $500,000. That contract is evidence of what a particular buyer is willing to pay under those circumstances. If an appraisal subsequently concludes that the property is worth $485,000 for the purpose of the lender’s valuation, the second number doesn’t erase the first one. But it may change the financing available to that buyer.
That’s the practical issue. If the appraisal supports the lender’s requirements, financing can generally continue through underwriting. The seller may not automatically receive the appraisal report or even be told the exact appraised value, since the appraisal was prepared as part of the buyer’s lending process.
If the appraisal comes in below the purchase price and affects financing, however, the difference has to be addressed somehow. What happens next depends on the contract, financing, appraisal contingency, lender requirements, available funds, and what both sides are willing to do.
- The buyer may have the right to cancel. If the contract contains an appraisal or financing contingency that applies and the required conditions are met, the buyer may have the right to terminate. Whether earnest money is returned depends on the contract and applicable requirements. So “the appraisal was low” doesn’t by itself tell us what the buyer can do. We have to look at what the agreement actually provides.
- The parties can renegotiate. The seller might reduce the price, the buyer might contribute additional cash, or both sides might absorb part of the difference. Notice that the appraisal doesn’t tell us which of those solutions is correct. It identifies a problem affecting the transaction; the contract and the priorities of the parties determine how—or whether—they solve it.
- The buyer may bring additional cash. If permitted by the financing and contract, a buyer may decide the home is still worth the agreed purchase price and use personal funds to cover some or all of the difference. Whether that’s realistic depends on more than willingness. Available cash, lender requirements, loan structure, and the buyer’s other financial priorities can all affect the decision.
- The appraisal may be reviewed. Disagreeing with the value isn’t the same thing as having evidence that supports reconsidering it. If there appears to be a factual error, an important property characteristic was missed, or more appropriate comparable sales may be available, the buyer can talk with the lender about its reconsideration-of-value process. Additional information may sometimes be submitted for review, but a different result is never guaranteed.
CAN WE DO ANYTHING BEFORE THE APPRAISAL?
We can’t control an appraiser’s independent opinion, nor should we try to. What we can control is whether useful, accurate information about the property is available through appropriate channels. Significant improvements, relevant permits or documentation when available, and property characteristics that may not be obvious from public records can all help make sure the property is accurately understood.
Pricing also deserves some thought here. An enthusiastic buyer can offer whatever amount the buyer is willing to offer, but a mortgage lender still has its own requirements. If a contract price moves substantially beyond what the available market evidence appears to support, the possibility of an appraisal gap becomes part of the transaction. That doesn’t necessarily mean accepting the offer is a mistake. It means we should understand the risk rather than discovering it later.
A low appraisal can create a problem, but it doesn’t automatically tell us the solution—or whether the sale is doomed. Sometimes the value is well supported and the price is renegotiated. Sometimes the buyer decides the property is worth contributing more cash. Sometimes both sides compromise. And sometimes there is relevant information that deserves further review.
If an appraisal issue arises during your sale, I’ll help you understand what it changes for the transaction, communicate with the buyer’s agent, and work through the real estate options available under the contract. The objective isn’t to “beat” the appraisal or prove that one number is right and another is wrong. It’s to determine what the new information changes, what options remain, and whether there’s a practical path to closing that still makes sense for you.
