How to Overcome a Low Appraisal

You accepted an offer on your home, made it through inspections, started packing and you're looking forward to closing.

Then you get the news:

The appraisal came in lower than the purchase price.

Does that mean the sale is over?  Not necessarily.

A low appraisal can create a bump in the road, but there are several ways buyers and sellers can work through an appraisal gap and keep the sale moving toward closing.

What Is a Low Appraisal?

When a buyer is financing a home purchase, their lender will typically require an appraisal to provide an independent opinion of the property's value.

The appraiser considers factors such as the home's location, size, condition, features and recent comparable sales.

If the appraised value comes in below the purchase price, there's an appraisal gap.

For example, if a buyer agrees to purchase a home for $500,000 but the appraisal comes in at $485,000, there's a $15,000 appraisal gap.

Because the lender bases the buyer's financing on the appraised value, not necessarily the agreed-upon purchase price, that difference may need to be addressed before the transaction can close.

Exactly what happens next depends on the buyer's financing, the terms of the purchase agreement and whether the contract includes an appraisal contingency or appraisal-gap provisions.

What Can You Do If the Appraisal Comes in Low?

A low appraisal doesn't automatically mean the transaction is over. Depending on the situation, there may be several options.

1. Review and Challenge the Appraisal

The first step is to carefully review the appraisal.

Were important features of the home overlooked? Was the square footage correct? Were appropriate comparable properties used? Have more relevant sales closed recently?

If there appears to be a legitimate issue, the buyer may be able to work with their lender to request a reconsideration of value and provide additional information or comparable sales for the appraiser to review.

There's no guarantee the value will change, but it's worth exploring when there is strong evidence supporting a different valuation.

2. The Buyer Can Bring Additional Cash

If the buyer has the financial ability and wants the home badly enough, they may choose to cover some or all of the appraisal gap with additional cash.

For example, if the purchase price is $500,000 and the home appraises for $490,000, the buyer might agree to bring additional funds to cover the $10,000 difference.

Whether this makes sense depends on the buyer's finances and how strongly they feel the purchase price reflects the home's actual market value.

3. The Seller Can Reduce the Price

The seller may agree to lower the purchase price to the appraised value or somewhere closer to it.

While no seller loves reducing an agreed-upon price, sometimes accepting a lower price makes more sense than putting the home back on the market and starting over.

That's especially true when the difference is relatively small or the seller has another home purchase or move depending on the current sale closing.

4. The Buyer and Seller Can Meet in the Middle

This is often where negotiation comes into play.

Instead of one party absorbing the entire difference, the buyer may agree to bring additional cash while the seller agrees to reduce the purchase price.

A $10,000 appraisal gap, for example, might become a $5,000 price reduction combined with $5,000 in additional funds from the buyer.

There isn't one formula that works for every transaction. The best solution depends on the circumstances and priorities of both parties.

5. The Transaction May Be Cancelled

Sometimes the appraisal gap is simply too large to overcome.

Depending on the terms of the purchase agreement, the buyer may have the right to cancel if the property doesn't appraise at the agreed-upon price.

Before making that decision, both sides should understand their contractual rights, financing requirements and other available options.

What Sellers Should Know Before Accepting an Offer

The highest offer isn't always the strongest offer.

When I'm helping a seller compare multiple offers, we look beyond the purchase price.

How much is the buyer financing? Do they have an appraisal contingency? Are they offering appraisal-gap coverage? How much additional cash are they willing and able to bring to closing if the appraisal is low?

A slightly lower offer with strong financing and appraisal-gap protection can sometimes be more attractive than a higher offer that's completely dependent on the home appraising at the purchase price.

Price matters, but so do the terms behind the price.

Pricing Your Home Still Matters

A competitive market doesn't mean a home can be priced at any number.

Recent comparable sales still matter, particularly when a buyer is obtaining financing.

That's why part of my listing process is looking carefully at recent sales, current competition and your home's unique features before we determine a pricing strategy.

And if we receive multiple offers, we'll evaluate the entire offer, not just the number at the top of the purchase agreement.

Thinking About Selling Your Twin Cities Home?

If you're considering selling, you don't have to wait until you're ready to put a sign in the yard to start planning.

I can help you understand your home's potential market value, what you may want to do before selling, and how we'll position your home when you're ready to go to market.

Contact Myra Jensen at BRIX Real Estate at 763-227-0618 to schedule a complimentary home selling consultation.

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