What happens if the appraisal is lower than the offer?

If an appraisal comes in lower than the offer on a property, it can have several significant impacts on the real estate transaction. This situation is particularly common in competitive markets where buyers may offer more than the property's appraised value to secure a deal. Here's what typically happens:

Impact on Financing

When a buyer is financing the purchase, the lender uses the appraised value to determine the loan amount. If the appraisal is lower than the offer price, the lender will base the loan on the appraised value, not the agreed-upon purchase price. This means the buyer may face a shortfall between the loan amount and the offer price. For example:

• If a buyer offers $400,000 for a property, but the appraisal comes in at $380,000, and the lender offers an 80% loan-to-value ratio, the loan would be $304,000 (80% of $380,000) instead of $320,000 (80% of $400,000).
• The buyer would then need to cover the $16,000 shortfall plus their original down payment.

Buyer Options

When the appraisal is lower than the offer price, the buyer has a few options:

• Negotiate a Price Reduction: The buyer can ask the seller to lower the purchase price to match the appraised value. This is often the preferred solution since it allows the deal to proceed without additional financial strain on the buyer. However, the seller must agree to the reduction, which may not always happen in a hot market.
• Pay the Difference in Cash: The buyer can choose to pay the difference between the appraised value and the offer price out of pocket. This is sometimes done in competitive markets where buyers are willing to offer more than the appraised value to win a bidding war. However, it may not be financially feasible for all buyers.
• Walk Away: If the contract includes an appraisal contingency, the buyer can back out of the deal without penalty if the appraisal comes in low. In this case, the buyer would typically get their earnest money deposit refunded. This is a last resort when negotiations fail.
• Request a Reappraisal or Challenge the Appraisal: The buyer may choose to dispute the appraisal by providing additional evidence, such as comparable properties (comps) that may not have been considered in the initial appraisal. Alternatively, the buyer can request a second appraisal, though this could incur additional costs and does not guarantee a higher appraisal value.

Seller Options

Sellers also have a few options when the appraisal comes in low:

• Agree to Lower the Price: To keep the deal intact, the seller may agree to reduce the sale price to match the appraised value. This is often the most straightforward solution but may be less appealing if the seller was expecting a higher price.
• Seek a Cash Buyer or Larger Down Payment: The seller might try to find a cash buyer who does not require financing, thereby bypassing the need for an appraisal. Alternatively, they could negotiate with the current buyer to make a larger down payment to bridge the gap between the appraised value and the offer price.
• Terminate the Sale: If the appraisal contingency allows it, the seller might decide to walk away from the deal, especially if they believe they can find another buyer willing to pay more or if they don't want to reduce the price.

Renegotiating the Contract

When the appraisal comes in lower than the offer, it often opens the door for renegotiation. Both parties may need to revisit the terms of the deal to ensure it moves forward:

• Price Adjustments: A common renegotiation involves adjusting the sale price closer to the appraised value.
• Shared Payment: Sometimes, both the buyer and seller agree to split the difference between the appraised value and the offer price, sharing the financial burden of the shortfall.

Appraisal Contingency

Many real estate contracts include an appraisal contingency, which protects the buyer if the property does not appraise for the offered price. If the appraisal comes in low, the buyer can either renegotiate or back out of the deal without losing their earnest money deposit. The presence of an appraisal contingency is an important safeguard for buyers, particularly in fluctuating or competitive markets.

Impact on the Seller

For sellers, a low appraisal can be disappointing and potentially derail a deal. In some cases, it may signal that their property is overpriced or that the market conditions have shifted. Sellers in a competitive market may be reluctant to lower the price, but if they want to keep the sale on track, they might have to make concessions.

Appraisal Review Process

If a buyer or seller believes the appraisal was inaccurate, they can request a review or appeal of the appraisal. The lender or appraisal management company may review the original appraisal report to ensure it was completed accurately. However, successful challenges are relatively rare, and a new appraisal is not guaranteed to result in a higher value.

Long-Term Impact

While a low appraisal can complicate a transaction in the short term, it can also help ensure that buyers are not overpaying for a property. For sellers, it may be a sign to adjust expectations or pricing in a cooling market. Ultimately, the appraisal process helps to bring fairness and stability to the real estate market by preventing inflated property values from skewing transactions.
When an appraisal comes in lower than the offer, it can lead to renegotiations, adjustments in financing, or even the cancellation of the deal. Buyers and sellers should be prepared for this scenario and understand their options, which may include renegotiating the sale price, covering the difference in cash, or walking away from the transaction if the appraisal contingency allows.