A low appraisal isn’t good, but it’s not necessarily the death knell for a sale. If you’re a seller, there are some things you can do to try and keep your sale moving forward, and it may mean adjusting the price.
If you’re a buyer and the seller won’t budget on a low appraisal, your best bet is to negotiate with them. If you’re a seller, you should reconsider lowering your price or offering additional incentives if you want the deal to go through.
For Buyers: The Seller Refuses to Lower the Price
If the seller won’t budge, the deal typically falls apart. That means the seller must relist and take their chances that the next buyer will offer the same price and that the new buyer’s appraisal will come in at value.
This approach can be very risky. More often than not, the second appraisal with the second buyer is not much better than the first. Getting that second buyer and appraisal can take weeks.
It’s possible that the buyer will ask the seller for an extension of time while they find a new loan and a new appraisal. That’s extremely rare. Typically buyers have cold feet, have already spent time and money on the first loan and are not interested in going through the entire loan process again.
If you’re a buyer, you should negotiate with the seller as much as possible. An appraisal contingency will provide you with a way out of the sale with earnest money intact, so don’t waive it.
For Sellers: The Buyer Can Back Out
Either because of cold feet or because they can’t get a loan, the buyer may back out of the contact. If the buyer puts down 5% or less, this outcome is particularly common.
If the buyer has a loan contingency, they will be able to back out of the sale without forfeiting their earnest money deposit.
However, if they signed with an appraisal gap contingency, the buyer will be responsible to pay the specified price “gap” between the appraisal price and the home price.
Buyers: Ask for a Price Adjustment
If the appraisal is low, the buyer’s lender will only fund the appraised amount. In that case, the buyer can ask the seller to lower the price to the appraised amount. This outcome is very common in low appraisal situations.
As a seller, you need to weigh whether or not you should adjust the price. If the seller has an appraisal gap contingency, they are obligated to fund the gap amount stated in the contract.
If a buyer has put down 20% or more, a low appraisal is much less problematic – and may not be problematic at all because the buyer is likely still going to be able to proceed with their loan and to close escrow. Since the buyer has so much of their own money in the sale already, the lender will not have to fund the home’s full purchase price, and the appraisal shouldn’t make a difference.
The only real problem you may face is if your buyer gets cold feet. That issue can usually be easily overcome with a minor reduction in final sales price.
Appealing a Low Appraisal
Appraisal rules are set up in a way that is meant to ensure the seller has no influence over the outcome. The bank underwriter wants to keep appraisals independent to make sure they’re not overpaying for the property their funding a loan on.
That’s why pleading with the bank is not always possible if your appraisal is low. You can, however, ask the buyer or buyer’s agent to ask the bank about appraisal appeal rules. You can likely appeal the appraisal but there’s no guarantee the bank will take your valuation.
If you’re having low appraisal problems, it most likely means your home has too high of a listing price. That means adjusting your price accordingly, or finding another realtor who can accurately set your price and negotiate with buyers so you can get the best deal possible.