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What To Do When an Appraisal Is Lower Than the Offer

TLDR

What You Need To Know

  • If the appraisal is lower than the offer, the buyer’s loan may not get approved. You could lose the sale if you can’t agree on next steps with the buyer
  • Appraisals mostly rely on the details of comparable home sales (aka comps) in your area to determine the value of your home
  • Negotiating is always an option after a low appraisal. Talk to the home buyer and their real estate agent about making up the difference (aka appraisal gap)

Contents

You’re selling your home. You’ve accepted an offer, and it looks like it’s smooth sailing ahead.  But what happens if the home’s appraised value is lower than the buyer’s offer? Is the sale sunk or can it be salvaged?

If the appraisal is lower than the offer, the buyer’s loan may not get approved. And that means you could lose the sale if you can’t agree on next steps with the buyer because a mortgage lender isn’t going to lend the buyer more money than the house is worth. 

Before you start worrying about losing the sale, spend some time exploring how you can save it. 

Let’s look at why low home appraisals happen, how often they happen and what to do when they happen.

How Does a Low Appraisal Happen? 

Hopefully, you and your real estate agent priced your home somewhere near its real value. But, occasionally, low appraisals do happen.

While a property’s condition may affect a home’s appraisal, low appraisals are commonly triggered by the state of the housing market. 

Appraisals mostly rely on the details of comparable home sales (aka comps) in your area to determine the value of your home. 

Local market conditions and the prices similar homes are selling for in your area will affect your appraisal. 

The market shifted

Say there weren’t many houses on the market when you and your real estate agent priced your home, but now the market is saturated with more homes than buyers. A shift from a seller’s market to a buyer’s market generally leads to depreciation (think: decline in value) of the homes in the area. 

If the real estate market shifted between the time of the offer and the appraisal, that could account for a lower appraisal. 

Lack of comps

If no homes have recently sold in your area or the homes that sold are much higher or much lower in value than your home, there may be a lack of comps. When there’s a shortage of comparable properties, the appraiser may need to perform an isolated appraisal. 

Without comps, the appraiser has no metric to measure against your property. While a good appraiser should be able to provide an accurate appraisal without comps, it may be lower than the sale price.

Recent foreclosures or short sales

If there have been multiple foreclosures or short sales in the neighborhood recently, the entire neighborhood will depreciate. The foreclosures and short sales may be due to underlying economic problems in the area, such as large employers moving away or closing down or a sudden spike in crime.

These factors (among others) could influence an appraiser to assign a lower appraisal value.

How Can I Avoid a Low Appraisal? 

Preparing for a low appraisal is your best, and should be your first, defense. Although much of the appraisal depends on the market, there are a few ways to avoid a low appraisal.

Understand what appraisers look for 

An appraiser measures the value of a home by a handful of metrics. Yes, comps play a big part in determining the value of the property, but there are a few other things appraisers look at.

  • Size, layout and condition: Appraisers take the square footage of a home and property into account as well as the layout and condition of important property fixtures. If your home is smaller or not well maintained in comparison to the average home in the area, it may lower your appraisal price. On the flip side, if your home is larger or newer, it could raise the appraised value of the home. 
  • Improvements and renovations: An appraiser will normally consider home improvements or renovations as added value. Let the appraiser know what renovations you’ve made and make sure it gets into their report.

Address common property issues 

If you’re preparing for an appraisal, there are a few things you should prioritize. First, make sure your heating and cooling system, appliances and fixtures, like lights or fans, are working. Next, take care of any necessary structural, foundational or health concerns in the home. 

Research comparable properties

Comps are weighed pretty heavily during an appraisal. Research comps in your area to guesstimate what your property is worth and learn what the market is doing. That way, the appraised value will come as less of a surprise. 

Make sure to have your researched comps ready to share with the appraiser during the appraisal.

How Can I Salvage the Sale After a Low Appraisal?

A low home appraisal doesn’t always mean the sale is dead in the water. In fact, it rarely means that. What it does mean is that you and the buyer will have to be a little more flexible and work around it. There are various strategies you can use after getting a low appraisal.

Lower the asking price

As a seller, you can lower the asking price, offering to sell your home for a price that’s closer to the appraised value. 

Lowering your asking price is the easiest way to keep the sale afloat – and this option is the only option you have complete control over. It makes the lender happy. It makes the buyer happy. And you get to sell your home.  

The only downside is that you’ll lose out on the appraisal gap (think: the difference between a home’s appraised value and its sale price). If you were counting on all the cash from the sale price to make a down payment on a new home or for anything else, this may not be a realistic option for you. 

Negotiate with the buyer

Negotiating is always an option after a low appraisal. Talk to the home buyer and their real estate agent about making up the difference (aka appraisal gap). The buyer can either make a larger down payment, or you and the buyer can each pay a part of the shortfall. Both are valid options. You’ll just need to figure out what’ll work best. 

Challenge the appraisal  

Challenging the appraisal is an option you should keep in your back pocket. If you’re interested in this option, here’s how it works: The seller can’t challenge the appraisal – only the buyer can. 

Ask the buyer or their agent for a copy of the appraisal report. Read it and check for errors. If you find something that’s wrong or you’re sure the home is worth more than its appraised value, ask the buyer if they’d be willing to dispute the appraisal. 

Challenging the appraisal value and requesting a second appraisal all fall on the buyer. If they’re open to it, you could offer to split the cost of a new appraisal or pay for it as a show of good faith. 

Provide the buyer with any relevant information on the property, recent comps and anything else that would support their challenge of the appraisal. 

When Should I Back Out of the Sale?

Are you sure the appraisal is lower than the market value of your home? If the buyer won’t challenge the appraisal or is unwilling to negotiate, you might want to consider backing out of the sale. But think long and hard before you walk away from the deal; you may find another buyer, but you may end up dealing with the same issues. 

If you end up backing out of the deal, consider waiting for the market to improve or revert to a seller’s market before you relist your home. If you had multiple offers, dive back into your pile of purchase offers. You may find a buyer who’d be willing to pay your original sale price.

It’s Not Over Yet

A low appraisal isn’t the end of your home sale. It all depends on what you and the buyer decide to do. Will you a) accept less, b) compromise with the buyer or c) challenge the appraisal?

When it comes to saving the sale, the answer is d) all of the above are perfectly acceptable options. If all else fails, you can sail away from the sale, relist and hope that the housing market’s winds are more favorable next time. 

ICYMI

In Case You Missed It

  1. Appraisals mostly rely on the details of comparable sales (aka comps) to determine the value of your home

  2. Challenging the appraisal value and requesting a second appraisal falls on the buyer

  3. If the buyer won’t challenge the appraisal or is unwilling to negotiate, you might want to consider backing out of the sale

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