A low appraisal doesn't always mean a canceled deal! You have options, and this guide will walk you through them.
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A low appraisal may seem like a major misfortune when you're buying or selling a house. But low real estate appraisals are more common than you think. According to a 2024 Zillow survey, 52% of buyers said their final offer was contingent on the home appraising at a minimum amount, and 23% of sellers said at least one of their offers fell through because the appraisal was lower than the purchase price.
A low appraisal doesn't always mean a canceled deal. It sometimes means you have to pivot and renegotiate. Read on for our tips on how to handle a low appraisal.
An appraisal is a professional report that helps gauge a home's value. Any homeowner can get a home appraisal at any time.
For example, if a homeowner is refinancing their mortgage, an appraisal is usually required. But the most common time an appraisal is performed is when you're buying or selling. If you're financing the purchase, your lender will order an appraisal to ensure the house is worth the amount the bank is agreeing to finance. It's one of the final steps in the home-buying process, and it's an important factor to the sale going through.
Home appraisals typically cost between $300 and $600, and they're ordered by the lender and paid for by the buyer.
Appraisals are a standard part of the home-buying process, and they protect the buyer's lender from offering too much money for a home that isn't worth the cost. While this may seem like a formality, in hot real estate markets, bidding wars can drive home sale prices well above the true value, which is a red flag for lenders.
A home appraisal contingency is an addendum to the offer contract a buyer submits. It states that if the appraisal comes back low, the buyer has the option to back out of the deal and get their earnest money back.
What the lender is looking for is a healthy loan-to-value ratio, often abbreviated as LTV. It’s a risk assessment calculation of the amount of money they’ll be financing in the mortgage (not the sale price), divided by the appraised value. Generally speaking, here’s what your appraisal outcome means:
Some all-cash buyers who are home shopping in a competitive sellers market (where there are many buyers vying for relatively few homes) will waive the appraisal contingency to make their offer more attractive for the seller. Cash buyers may decide to skip an appraisal altogether, they might have an appraisal done just for their own knowledge (without a contingency), or they may still submit an appraisal contingency, just as a non-cash buyer would do. It’s up to the individual cash buyer.
In a home purchase, appraisals are completed by a third-party licensed appraiser who is hired by the lender. The appraiser is typically chosen at random and can't be connected to the transaction in any way or have any relationship with the buyer or seller. The appraisal happens sometime between the time the home goes under contract and the projected close date.
During the appraisal, the appraiser walks the property — both the interior and exterior — taking photos and notes. After the on-site evaluation, the appraiser writes a report, combining their notes on the home's condition with local valuation information. The result is a final document that identifies the appraised value of the home.
It's important to note that since the lender orders the appraisal and the buyer pays for it, neither party is obligated to share the actual report with the seller.
Also called a summary appraisal, a drive-by appraisal is an exterior inspection only, combined with local valuation info. They usually cost less than a full appraisal but may not be accepted by a lender. Most lenders require a full interior and exterior appraisal.
Remember that an appraisal is not the same as a home inspection. While an appraiser and a home inspector may look at the same features of your home, an appraiser won't necessarily test the functionality of all your home's systems, nor will they flag specific items of concern. What the appraiser is concerned with is determining the condition of the home and, therefore, its value.
While they're not looking for things to fix, here's what appraisers are looking at:
There are quite a few reasons your home's appraisal might come in lower than you expect. Here are some of the common culprits.
In a sellers market, bidding wars often drive home sale prices higher than appraisals can support.
In a buyers market (and especially a market that has recently shifted), sellers may mistakenly overprice their home because they're not aware of how much their value has decreased. A glut of foreclosures and distressed homes in your area can also affect your home's value.
A poorly trained appraiser or someone who's unfamiliar with the intricacies of your local market can produce a low appraisal.
An appraiser fails to take upgrades, popular features or upscale amenities into account.
An appraiser is using comparables that aren't a great match with the home being appraised. Comps should be both recent and similar. They should also only be using sold homes, not homes that are currently on the market.
If you've already negotiated a closing cost credit and the purchase price is higher to reflect the cash back the buyer will receive at closing, it can mean your appraisal has to come in higher than it would have otherwise.
If the house appraisal comes back lower than the purchase price, the buyer has a few options to keep the deal alive.
The buyer can increase their down payment to make up the difference. For example, if the buyer needed the appraisal to come in at $300,000 but it comes in at $290,000, the buyer can pay the $10,000 difference in cash. What the lender is concerned about is the ratio of the loan to the appraised value of the home, not necessarily the purchase price.
Let's say the buyer planned to put $60,000 down on a $300,000 home (a 20% down payment). If the appraisal comes in $10,000 low, the buyer could shift $10,000 of the money they’ve set aside for their down payment to make up the difference.
The downside is that they’ll be putting less than 20% down and have to pay private mortgage insurance (PMI) every month until their equity in the home's loan-to-value ratio is 20%. Of course, this arrangement is subject to the lender's approval of the smaller down payment and greater loan amount.
As the person who paid for the appraisal, the buyer can ask their lender to challenge the appraisal if they believe the appraiser used incorrect information or bad comps, or if they weren't familiar enough with the area.
Not an ideal situation for the seller or the buyer, but if the buyer signed an appraisal contingency, they can cancel the contract and walk away from the deal.
We've talked about the options a buyer has to tackle a low appraisal, but what can you, as the seller, do to help encourage the deal to move forward? There are a few actions you can take, all before the appraisal. Remember, appraisals are subjective, so it's important to prepare for a low appraisal, just in case.
If you luck out and accept an offer from an all-cash buyer, you can avoid the appraisal contingency completely — or at least lessen the potential of a low appraisal harming your deal. According to a Zillow analysis, 30% of all buyers pay cash.
If you hired a real estate agent, they should have given you a comparative market analysis (CMA) when you were first deciding on a listing price, along with comps to prove your home's value. Keep copies of the comps and give them to the appraiser when they arrive at the home.
If you've had your land surveyed, done any major improvements or renovated, have receipts handy for the appraiser so they can calculate the added value.
One of the most important things that an appraiser assesses is the condition of your home, so make sure it looks clean, tidy and well-maintained. Clean the gutters, touch up paint, clean thoroughly and make sure major systems are operational. You'll also want to make sure your smoke and carbon monoxide detectors are functioning. It's likely you already took some of these steps when you got your house ready to list, but if your home has been on the market for a while, it's worth doing another deep clean.
If you’ve followed the pre-appraisal tips above and your appraisal still comes in low, here are some actions you can take to course correct.
Ask the buyer or their agent for the appraisal report if you believe there is misinformation in it. If they're willing to share a copy of it with you, go through and make sure that factual items are correct. Ultimately, it's up to the buyer and their agent to report misinformation if it's found, but the more you can work together, the more likely the deal is to move forward.
If the buyer is willing to challenge the appraisal, provide any documentation that could help them make your case, including comps, receipts, information on market conditions, or proof that the appraiser was unfamiliar with your area. You'll also want to point out exactly which parts of the appraisal are being disputed. Typically, it will be the buyer's real estate agent who brings up the dispute with the lender.
If the lender agrees that the first appraisal is inaccurate, they may order a second appraisal. Again, the buyer would be responsible for paying, but you can always offer to split the cost with the buyer as a good faith effort to keep the deal together.
Unless your buyer was looking for a reason to walk away, they likely want the deal to stay together as much as you do. So that's when a second round of negotiations can begin. The ball's in the seller's court here — it's up to you to decide if you're willing to renegotiate the sale price so that it aligns with the appraisal outcome. Your decision depends on your financial situation and the state of your local real estate market (if you're selling in a buyers market, you may be better off renegotiating than starting over and trying to find a new buyer).
Keep an open mind when it comes to meeting in the middle. For example, you may not have to cover the entire difference between the sale price and the appraisal. If you've agreed to sell the house for $250,000 and it appraises at $230,000, you and the buyer could meet in the middle. You could lower the sale price to $240,000, and they could come up with an additional $10,000 out of pocket to satisfy the lender.
If the buyer can't come up with the difference but you know your home is worth more than what it appraised at, you can offer them seller financing for the difference — assuming you have enough cash. You'd essentially loan them the money, taking payments either in regular installments or in a lump sum down the road. If you're interested in pursuing this option, make sure to involve a lawyer.
If you're positive the appraisal came in lower than it should have but your buyer isn't willing to challenge it (or if the challenge fails), you may have to let the deal go. If you aren't in a rush to sell, you might consider waiting to find a new buyer once market conditions improve — consider selling in the spring, when the market tends to move faster.
If you have no choice but to relist in short order and you received multiple offers the first time around, you may be able to retain your existing sale price and find a new buyer who is willing to pay the difference — or perhaps your appraisal will come in higher next time! Or, if you’re in a hurry to sell, you may consider relisting with a lower starting sale price next time around.
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