When an appraisal comes in below the accepted offer, the buyer and seller need to examine the loan and purchase agreement. The next step depends on the size of the gap, available cash and the protections each side negotiated.
Options after a low appraisal
An appraisal below the contract price can change the buyer's financing. The parties may need to discuss additional cash, a price adjustment or cancellation under the agreement, after checking the lender's requirements.
Who the appraisal is actually for
In a financed purchase, the lender orders the appraisal to assess the property supporting the loan. Its purpose and independence differ from the seller's pricing analysis.
It is also a different exercise from the two other numbers that get quoted at you. What separates an appraisal from a market analysis from an online estimate is in its own note.
Why it happens
- The house sold in a bidding situation and the comparable sales have not caught up to it yet
- It is unusual for the street, and unusual is the hardest thing to find comparables for
- Recent work was done without permits, so it does not count the way the owner thinks it counts
- The appraiser used sales from a stretch of the market that is not really the same market
The four ways out
The buyer brings the difference in cash. The loan is based on the appraised value, so the buyer covers the gap on top of the down payment. This requires the buyer to have the necessary cash available.
The seller lowers the price to the appraised value. Worth taking more seriously than it usually is. The seller should compare the proposed adjustment with the costs and uncertainty of returning to the market.
The two sides split it. The agreed division must work with the buyer's loan and available cash.
The buyer walks. Whether the earnest money goes with them depends entirely on what the contract says about financing and appraisal, which is why that paragraph is worth reading before it matters rather than after.
What an appraisal gap clause actually commits you to
In a competitive offer a buyer may agree in advance to cover a shortfall up to a stated amount. It makes the offer stronger because it moves the risk off the seller. It is also a real promise of real money, and a buyer who writes one should be able to say out loud where that money is coming from.
If the answer is that it will not be there, the clause is not a negotiating tactic, it is a problem scheduled for three weeks out.
If you are the seller
Find out whether the appraiser had the information that supports the price, because often they did not. A floor plan with measured square footage, the list of what was replaced and when, and the sales you would have used are all things that can be provided. A challenge is not a negotiation and it does not usually succeed, but it succeeds often enough to be worth one attempt when there is a real factual gap to point at.
Review the report's factual basis before deciding how to respond. The appraised value, loan requirements and purchase agreement need to be considered together.
Whether the loan survives the change, and what covering a gap does to your qualifying, belongs to your lender. What your contract lets you do, and what happens to the earnest money, belongs to an attorney. What any of it does to your taxes belongs to your CPA.
If you are weighing the sale and the purchase against each other, the note on selling first or buying first is the other half of this, and the buyers page covers the order things happen in.
This note is general. It is not lending, tax or legal advice, and what applies to your transaction depends on your contract and on terms only your lender and your attorney can give you.