What to Do When the Appraisal Comes in Low

The home buying process is full of discrete steps with significant consequences. One such step that you’ll come across later in the process is the home appraisal. Though the result of an appraisal is not necessarily make or break for your home purchase, it is generally ideal that your appraisal does not come in lower than your offer price.  

In this article, we will explain how appraisals work, what appraisers look for, and what happens after an appraisal comes in low.

What is a home appraisal?

A home appraisal is typically required by lenders during the mortgage process to determine the value of the home, and therefore the amount of money they will lend you for it. Note that an appraisal is not the same thing as a home inspection, though the two are often confused.  

The lender will order the appraisal, but the borrower is generally the one who will pay for it. Once an appraisal has been ordered, an independent, licensed home appraiser will conduct their review of the property.  

On a high level, appraisers look for factors that affect home value, so things like the condition of the home, its characteristics, location, and other market factors will all be under consideration.  

After the appraisal is finished, your lender will provide you with a copy of the appraisal report to show you the findings. The appraisal step usually takes place after the purchase agreement is signed. That’s why it matters when the appraisal comes in lower than your agreed upon purchase price. We’ll explain what a low appraisal means for you further into this article.

What do appraisers look for?

Home appraisers are looking for things that indicate the current value of the home in the market. What they look for may vary depending on the type of home you’re buying. For example, if you’re buying a condo, the appraiser would be looking not just at the unit you’re buying, but the whole condo project itself.  

Still, there are some common things that appraisers will seek out in their assessment. Those could include:  

• Comparable sales. Generally, appraisers will report at least three comparable sales. These ideally would be for homes in the same neighborhood as that which you are buying or competing neighborhoods with similar conditions. A comparable home should be similar in its physical and legal characteristics to the home you are buying.  

• Environmental hazards. Appraisers must note hazardous conditions affecting the property or areas nearby. These can include things like hazardous wastes, toxic substances, asbestos-containing materials, urea-formaldehyde insulation, or radon gas.  

• Neighborhood analysis. The appraisal will look at neighborhood boundaries, characteristics, and the factors affecting the value and marketability of the properties in the neighborhood. Marketability can be affected by amenities, employment stability, appeal to the market, changes in land use, access to public transportation, and environmental concerns. 

• Layout and floor plan. Peculiar layouts can impact marketability. If you have a bedroom on a floor with no bathroom, that might make the home less appealing. But if comparable sales show acceptance of these quirks, they may not be that impactful on the value.  

• Gross living area. This refers to the above grade living area (no garages or basements). It is measured by the square footage of the exterior building dimensions per floor.  

• Condition of home. The appraiser will look at anything needing immediate repair, any deferred maintenance, deterioration, and other factors to determine and describe the overall condition of the property. 

Appraisers will also look at things like the quality of construction, whether or not there are any infestations, the actual and effective age of the property, and more. Of course, physical deficiencies that make a home unsafe or unsanitary will be significant issues for an appraisal report.

What happens if the appraisal is lower than the offer?

A low appraisal can throw a wrench in your homebuying process. When an appraisal is lower than the offer, it means that the lender will not be able to cover the full cost of the purchase. Buyers and sellers may need to pursue alternative options if they want to keep the deal on track.

What can be done about a low appraisal?

If your appraisal came in lower than you expected, there are a few options you can consider for your next steps. Before pursuing any of these, it might be smart to consult with your real estate agent, lender, or other qualified advisor about the risks and benefits.  

Ask for a Reconsideration of Value (ROV)

One way to approach a low home appraisal is by having your lender submit a reconsideration of value (ROV). This is essentially appealing the original appraisal assessment. Before you do this, be sure to consult with your real estate agent about the best way to do this.  

For one, you will need to collect examples of comparable sales in the area in which you are buying that support your claim about the home value. However, you should keep in mind that ROVs are often very difficult to win. It’s worth looking into, but it might not work out for you.  

Ask for a second appraisal

You could ask your lender to request a second appraisal, but know that this also does not have a very high likelihood of working out in your favor. You could end up paying for another appraisal that yields the same, or similar, result as the first one, and all you’ll have done is pay for two appraisals.  

Remember, appraisers are independent, licensed professionals who are obligated to provide accurate and fair assessments of properties. Lenders are unlikely to request a second appraisal without clear, compelling evidence of oversight in the first appraisal.

Renegotiate the purchase price

As the buyer, you could attempt to get the seller to renegotiate the purchase price. However, the seller is not obligated to do this, and in a seller’s market, they may not be interested in lowering the price. But if you have a seller who is eager enough to sell their home, there’s a chance they would be willing to meet the appraisal price.

Pay a larger down payment

Of course, the seller may decide they don’t want to lower the price. If you still want to move forward with the deal, you might be able to close the appraisal gap with cash. You could increase the amount of your down payment to cover the difference between the appraisal and the offer.  

However, it’s important to note that dipping into your cash reserves to potentially overpay for a home carries some risk, so do not make that choice lightly. Some lenders might let you use a gift to pay for this, but be sure you talk to your lender before attempting that.  

Walk away from the purchase

Though it would be understandably disappointing, if you have an appraisal contingency in your purchase agreement, it may be wise to walk away from the deal. With this contingency in place, you may get your earnest money deposit back, too. 

If you don’t have the appraisal contingency, walking away could result in the forfeiture of your earnest money and even legal action from the seller. Because of that, walking away may be best reserved for a last resort. Ultimately, this could potentially be best for you in the long run, as you would be avoiding purchasing a home for more than it’s worth.

Final Thoughts

It can be upsetting to see a home appraisal come in low. Perhaps you were perfectly happy to pay that price for the home, but it may just not have been in the cards. Though a low appraisal does not necessarily mean your home purchase will fall through, that can be a possible outcome. If your appraisal comes in lower than your offer, work with your seller, real estate agent, and lender to determine what options are available to you.