A low property appraisal can feel like an immediate roadblock in a real estate transaction, but it happens frequently in dynamic markets. When an appraiser values a home at less than the agreed-upon purchase price, it creates an “appraisal gap” that must be resolved before the lender will approve the mortgage.
Here is a breakdown of what a low appraisal means, the options available to buyers and sellers, and how to keep your transaction moving forward.
Frequently Asked Questions: Handling Low Appraisals
Q: Why do low appraisals happen?
A: Low appraisals occur when recent comparable sales (“comps”) do not support the contracted purchase price. This frequently happens in rapidly rising markets where prices outpace past sales data, or when a property receives multiple competitive offers above asking price. Checking recent home sales in your area can help gauge this risk early.
Q: Who suffers when an appraisal comes in low?
A: Both parties are impacted. Lenders will only finance a mortgage based on the appraised value or the purchase price—whichever is lower. This leaves a cash shortage that must be resolved for the buyer’s loan to proceed.
Q: What are the main ways to solve an appraisal gap?
A: When an appraisal comes in low, the transaction typically moves forward in one of four ways:
The Seller Lowers the Price: The seller agrees to drop the purchase price to match the appraised value.
The Buyer Covers the Gap: The buyer pays the difference between the loan amount and the sale price out of pocket in cash.
Both Parties Compromise: The buyer and seller split the difference (e.g., reducing the price partially while the buyer brings the remaining cash to closing).
Rebuttal or Re-Appraisal: The real estate agent submits additional comps for a Reconsideration of Value (ROV) or requests a second appraisal if factual errors exist.
Q: What happens if neither party can agree on a solution?
A: If the contract includes an appraisal contingency, the buyer can walk away from the deal and receive a full refund of their earnest money deposit. If the buyer waived the appraisal contingency, they must cover the gap in cash or risk forfeiting their deposit if they default.
Actionable Strategies for Buyers and Sellers
Review the Appraisal Report Carefully: Look for factual mistakes, such as incorrect square footage, forgotten upgrades, or missed bedrooms/bathrooms.
Pull Fresh Comparable Sales: Ensure the appraiser used the most recent neighborhood sales rather than older or distant properties.
Negotiate Early: Maintain open lines of communication. Sellers often prefer a slight price adjustment over putting their home back on the market.
Navigating Your Real Estate Options
Whether you are buying or selling, having accurate market data is essential for setting realistic expectations and avoiding appraisal surprises.
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