You’ve accepted an offer and the sale is moving forward — then the appraisal comes in lower than the purchase price. What happens now? Appraisal issues don’t derail most transactions, but they can create delays and sometimes require buyers and sellers to make new decisions. Understanding how the appraisal works, what a low value may mean for the buyer’s financing, and which options may be available can help you respond without assuming the sale is automatically in trouble.
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. It’s an independent opinion of value used by a lender when evaluating the property supporting a mortgage loan, and if the appraised value comes in below the agreed purchase price, the financing and contract terms will help 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 the property’s location, condition, size, features, improvements, and relevant comparable sales, along with other information appropriate to the valuation.
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.
WHY IS AN APPRAISAL NEEDED?
When a buyer is financing a purchase, the lender may require an appraisal or another acceptable valuation method to help determine whether the property provides sufficient collateral for the loan. The lender orders or manages the valuation process and reviews the result as part of underwriting.
The appraisal is primarily for the lender’s benefit, although it can also give the buyer useful information about the property and how its value was developed. For many first-lien mortgage transactions, the buyer is entitled to receive a copy of the appraisal or other written valuation from the lender.
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?
An appraisal and a contract price answer somewhat different questions. The contract tells us what one particular buyer and seller agreed to. The appraisal provides an independent opinion of value for the purpose of the assignment.
If the appraised value 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 for the lending process and the buyer receives the copy.
If the appraisal comes in below the purchase price and affects financing, however, the parties will usually need to address the difference. What options are available depends on the purchase contract, financing, appraisal contingency, lender requirements, and the willingness of both sides to negotiate.
- The buyer may have the right to cancel. If the contract contains an appraisal or financing contingency that applies to the situation and the required conditions are met, the buyer may have the right to terminate the agreement. Whether earnest money is returned depends on the contract and applicable requirements, so the specific agreement matters.
- The parties can renegotiate. The seller might agree to reduce the purchase price, the buyer may agree to bring additional funds, or the two sides may negotiate another solution that works within the buyer’s financing and the purchase agreement. Neither party is automatically required to absorb the entire difference unless the contract says otherwise.
- The buyer may bring additional cash. If permitted by the financing and contract, a buyer may decide to pay more of the difference between the appraised value and purchase price from personal funds. The amount the buyer can and wants to contribute will depend on available cash, loan structure, lender requirements, and the buyer’s own priorities.
- The appraisal may be reviewed. 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 discuss the appraisal with the lender and ask 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 cannot control the appraiser’s independent opinion, nor should we try to. But we can make sure useful, accurate information about the property is available through appropriate channels. That may include a list of significant improvements, relevant permits or documentation when available, and information about comparable sales or property characteristics that may not be obvious from public records.
Just as important, pricing the home thoughtfully from the beginning can help reduce the chance of creating a large gap between the contract price and the market evidence an appraiser may be reviewing. A strong offer above asking price can be wonderful, but the financing still has to work if the buyer is relying on a mortgage.
A low appraisal can create a problem, but it doesn’t automatically end a sale. Sometimes the appraisal is supported and the price needs to be reconsidered. Sometimes the buyer contributes more cash. Sometimes both parties compromise. And occasionally additional information leads to further review of the valuation.
If an appraisal issue arises during your sale, I’ll help you understand what it means for the transaction, communicate with the buyer’s agent, and work through the real estate options available under the contract. The goal won’t be to “beat” the appraisal. It will be to understand the information in front of us and determine whether there is a practical path to closing that still makes sense for you.