What Happens If An Appraisal Is Lower Than An Offer On A Home?

Once you’ve listed your home and found a buyer who agrees with the sales price, you may feel like the hard work is over. But then the unexpected happens — you find out that the home appraised for less than the buyer’s offer.

This scenario is more common than you might think — one in 10 real estate agents reported home sales falling through due to a low appraisal value. So, what happens if the appraisal is lower than the offer? This article will explain what steps buyers and sellers can take if they run into an appraisal gap.

What Is An Appraisal Gap?

An appraisal gap occurs when a home’s sale price is higher than the home's appraisal price. That means the individual buying a house is paying more for the home than a licensed appraiser determined its worth.

An appraisal gap affects the buyer and seller in different ways — for the buyer, it can create challenges with their financing. Lenders are only willing to provide a mortgage loan for the appraised value, so the buyer either has to come up with additional funds or renegotiate the purchase price.

For the seller, an appraisal gap can cause the sale to fall through if the buyer is unable to obtain financing. The seller may also be forced to lower the price of the property or find a new buyer altogether.

Common Reasons For A Low Appraisal

Here are some reasons why a home appraisal may come in lower than expected:

• Shifts in the real estate market: If you’re operating in a buyer's or seller's market, this can lead to an appraisal gap. For instance, a seller’s market can often lead to bidding wars, which can inflate the price of the home.
• Inaccurate or lack of comps: A shortage of sold comparable homes can also be the reason for an appraisal gap since it makes it hard to determine the value of the property.
• Poor evaluation of the property: Appraisers must undergo state-approved instruction and licensing requirements, but an appraisal isn’t an exact science. Appraisers can make mistakes or have a personal bias that affects their evaluation of the property.
• Recent foreclosures or short sales: Economic problems involving career and lifestyle changes can cause foreclosed homes and short sales, which can cause an appraisal gap.

What Happens If An Appraisal Is Lower Than The Offer?

It’s possible for the value of a property to appraise lower than a purchase price offer. Depending on real estate market conditions, the buyer could pay the difference in cash or back out of the sale entirely. Here are some steps you can take if the appraisal is lower than the offer.

Renegotiate The Purchase Price

Buyers can use a low appraisal to get the sellers to negotiate the house price to the true value of the property. Lowering the purchase price will eliminate the appraisal gap and allow the sale to proceed as planned. It’s a good idea to have a REALTOR^® negotiate the terms on your behalf.

Extend The Appraisal Contingency

The buyers and sellers may agree to extend the contract’s appraisal contingency clause. This will give the buyers more time to get a second appraisal from a different lender.

Cover The Costs Out Of Pocket

If the buyers don’t have much room to negotiate and want to proceed with the home sale, they can pay the difference in cash. This may be the only way to buy your dream home, especially in a seller’s market. 

Shift Down Payment Funds  

If the buyer has enough down payment funds, they can take from it to cover the low appraisal. However, if they put less than 20% down, they will have to pay for private mortgage insurance (PMI).

End The Contract

If the buyer can’t make up the difference between the appraised value and purchase price, and there are no negotiations, then it might be best to walk away from the home sale. If you have an appraisal contingency in place, you’ll be able to back out of a house offer and keep your earnest money deposit.

Actionable Tips For Sellers In The Event Of An Appraisal Gap

An appraisal gap is problematic for the seller because it puts their home sale in jeopardy. A buyer may be unwilling or unable to pay more for the home than it’s worth. Here are some steps you can take if you run into this problem

Challenge The Appraisal

As we already stated, an appraisal isn’t an exact science and licensed appraisers can get it wrong sometimes. If you disagree with the results of an appraisal, you can challenge it. But this isn’t easy, and you’ll need to be able to prove that there were errors in the report or that the appraiser didn’t consider certain upgrades you made to the home.  

Convince The Buyer

If you’re operating in a seller’s market, you may be able to motivate the buyer to come up with the price difference to resolve the appraisal gap. For instance, by using local area comps, you can prove that the property is worth purchasing at the agreed-upon price.

Negotiate With The Buyer

If you don’t want to risk having the sale fall through, you may want to lower the house price to match the appraised value. If you’re trying to sell during a down real estate market, it may be too risky to hope you find another buyer.

Cancel The Contract

Finally, if you can’t afford to sell the home for less than the sales price, you may want to walk away from the contract. You can consider relisting your home once you’re in a seller’s market.

Should You Pay More Than The Appraised Value Of A Home?

Purchasing a home above the appraised value can be an expensive, long-term mistake if you don’t take your budget and goals into consideration. Before buying a home, it’s important to understand how much house you can afford.

This will keep you from purchasing an overpriced house that doesn’t fit your financial goals. Here are some factors you can consider when deciding whether you should pay extra money on a home purchase:

• You can afford bigger monthly mortgage payments
• You can afford to pay the difference between the appraised value and the accepted house purchase price without tapping into emergency savings
• You can build equity fast due to rising property values in the area
• You plan to live at the home for a long time to build equity
• You can afford closing costs if you plan to sell sooner

Should Buyers Ever Waive The Appraisal Contingency?

Waiving an appraisal contingency is an option, but it’s not usually recommended. The appraisal contingency protects buyers if the property doesn’t appraise at the agreed-upon price. It allows you to walk away from the sale and hang onto your earnest money.

If you waive this contingency, you could run into trouble with financing if there’s an appraisal gap. And if you do go through with the sale, you could be stuck with a home that’s worth less than you paid for it. It’s always a good idea to talk to a real estate agent or an attorney before agreeing to a home appraisal waiver.

The Bottom Line: A Low Appraisal Doesn’t Have To Be A Dealbreaker

An appraisal gap can negatively affect both the buyer and seller — the buyer can have trouble financing the home, and the seller is at risk of the sale falling through. A low appraisal doesn’t have to be a dealbreaker, but a successful resolution largely relies on real estate market conditions. If you’re looking to buy a home in the coming year, you can speak with one of our Rocket Homes℠ real estate agents today to explore your home purchasing options.