What Happens When a Home Appraisal Comes in Low?
You've agreed on a price.
The inspection is finished.
The mortgage is moving forward.
Then the appraisal comes back lower than the purchase price.
Now what?
A low appraisal can create a problem for both the buyer and seller, but it does not automatically mean the deal is over.
Understanding what happens next is an important part of buying or selling a home.
First, What Does the Appraisal Actually Do?
When a buyer is financing a home, the lender needs to determine whether the property provides sufficient value to support the mortgage.
An appraiser develops an opinion of the home's market value using information about the property, its condition, location, market conditions and relevant comparable sales.
This is different from an online home value estimate.
I've previously explained how Automated Valuation Models work and where their limitations are.
An appraisal is also different from a home inspection.
The inspection focuses primarily on the condition of the property. The appraisal is primarily about value for the lender.
What Happens When the Appraisal Is Low?
Let's use a simple example.
A buyer agrees to purchase a home for $500,000.
The appraisal comes back at $490,000.
There is now a $10,000 difference between the agreed purchase price and the appraised value.
That does not automatically mean the seller has to lower the price by $10,000.
It also doesn't automatically mean the buyer has to bring another $10,000 to closing.
What happens next depends on the financing, the purchase agreement and what the buyer and seller have already agreed to regarding the appraisal.
Possible solutions can include:
The seller reducing the purchase price.
The buyer contributing additional cash.
The buyer and seller negotiating somewhere in the middle.
Using an appraisal guarantee if one was included in the offer.
Requesting a reconsideration of value when there is a legitimate reason to question the appraisal.
Or, depending on the purchase agreement, the transaction may not continue.
This is why I often tell buyers that negotiating a home involves much more than deciding what number to write on the offer.
You can read more about that in my guide on how to negotiate the price of a home.
Can a Low Appraisal Be Challenged?
Potentially.
If there are factual errors, important information that wasn't considered, or concerns that the opinion of value isn't adequately supported, the borrower can talk with the lender about a Reconsideration of Value.
The lender controls that process.
Simply believing the house is worth more isn't enough. There should be a legitimate reason and supporting information for asking the lender to reconsider the appraisal.
Comparable Sales Matter Before the Appraisal Too
This is where the appraisal connects to something buyers and sellers should have been thinking about much earlier.
Comparable sales.
For sellers, looking carefully at recent comparable sales can help establish a realistic listing strategy before the home ever reaches the market.
I explain that process in Before Listing Your Home, Look at Comparative Sales.
Buyers should be thinking about comparable sales too.
Before making an aggressive offer, especially on a higher priced property, it's worth asking whether recent sales reasonably support the price.
You can also explore actual transactions throughout Southeast Michigan on my Sold Homes page.
The Highest Offer Isn't Always the Strongest Offer
There's an important lesson here for sellers.
Imagine receiving two offers.
One buyer offers $600,000 with financing and limited ability to cover an appraisal shortage.
Another offer is slightly different but includes stronger terms surrounding financing and appraisal.
Looking only at the purchase price doesn't tell you the entire story.
Price matters, but so do financing, concessions, inspections, appraisal language, closing terms and the buyer's ability to perform.
Understanding those differences before accepting an offer can become very important several weeks later when the appraisal arrives.
A Low Appraisal Is a Problem to Solve
I've been involved in transactions where an appraisal came in low and the transaction still moved forward.
The first step is understanding the numbers.
Then you look at the purchase agreement.
Then you determine what options are actually available to the buyer and seller.
Sometimes the price changes.
Sometimes the terms change.
Sometimes additional information needs to be reviewed.
And sometimes the parties decide not to continue.
The important thing is not to panic when the appraisal number arrives.
Understand what changed, what the contract says and what options remain.
Buying or selling a home involves several moments where the details of the transaction become just as important as the headline purchase price.
If you're considering buying or selling in Metro Detroit or Southeast Michigan, you can explore current local information through my Market Data or visit SoldByCaleb.com to get started.
Caleb Bonderenka