If you’re getting a home appraisal, then it means you’re in the homestretch of buying or selling a home. An appraisal is typically required by your mortgage lender before you’re approved for a loan, or serves as a professional opinion on a fair price for your home if you’re selling.
If all goes well, the home will appraise for at least as much as you’re offering to pay or sell the home for. However, if the appraisal comes in lower than the purchase price, it can present problems.
Although it doesn’t immediately doom the sale, a low appraisal is something that needs to be dealt with appropriately to ensure a successful transaction.
- If you’re a buyer and the home appraisal comes in lower than your offer, you have a few options — including renegotiating with the seller, disputing the appraisal, or covering the appraisal gap out of pocket.
- If the home appraisal is higher than your offer, that means you’re getting a good deal on a home.
- If you’re a seller and the home appraisal is lower than the offer, you can lower your asking price or cancel the deal, among other options.
How Does a Home Appraisal Work?
A home appraisal is a report conducted by a real estate appraiser that offers a professional opinion as to what the value of a home is on the open market.
There are different types of appraisals, including full appraisals, exterior-only appraisals, and rental analyses. Regardless of the appraisal type, the appraiser will create a document that provides information about a home, what they think it’s worth, and why they think it’s worth that amount.
Why do you need a home appraisal?
If a buyer defaults on their mortgage, the lender can begin a legal process called foreclosure to recoup its losses. However, this only works if the home sells for a price equal to or greater than the outstanding balance of the mortgage. If the lender gives a $500,000 loan on a home that’s only worth $400,000, the lender is taking on a big risk because it could lose out on $100,000.
Even if you don’t plan to use a mortgage to buy a home, an appraisal is still a good idea because it gives you the peace of mind that you aren’t overpaying.
For sellers, appraisals help determine a fair asking price for their home based on current market conditions.
What is an appraisal gap?
An appraisal gap is the difference between the appraised value of a home and the amount in the buyer’s offer. For example, if you offer to pay $500,000 for a home and it appraises for $450,000, then the appraisal gap is $50,000.
This term isn’t typically used if the home appraises for more than the buyer’s offer.
Are appraisal gaps common?
Appraisal gaps are relatively uncommon, historically occurring in around 7% to 9% of home purchases. During the COVID-19 pandemic, however, a fast-moving housing market, frenzied bidding wars, and a lag in data on nearby comparable homes — called “comps” — led to appraisal gaps occurring at an unprecented rate of 20.1% in May 2021. They became less common by the end of 2022 due to rising interest rates, high inflation, and a slower housing market.
When appraisal gaps do happen, they can occur for a variety of reasons, including:
- Unrealistic offer price.
- Bidding wars that inflate the price of the home.
- Unique home with limited comps.
- Recent short sales and foreclosures of other homes in the area.
- Poor evaluation by the appraiser.
In a 2021 study on potential appraisal bias, Freddie Mac found that homes in minority tracts — or areas where Black or Latino people make up at least 50% of the population — receive appraisal gaps more often than homes in white tracts. From 2015 to 2020, Freddie Mac examined appraisal gap data for single-family homes. In tracts where Latino people made up 50% to 100% of the population, 15.4% of homes received an appraisal lower than the contract price, and in tracts where Black people made up 50% to 100% of the population, 12.5% of homes received an appraisal lower than the contract price. This is contrasted with white tracts, where 7.4% of homes received a low appraisal.
Buyers: What To Do When the Home Appraisal Is Lower Than the Offer
If the home appraisal comes back less than your offer on a house, it can cause issues. For one, if you’re taking out a mortgage, your lender may require a larger down payment or refuse to approve financing. Even if you aren’t getting a mortgage, you may feel hesitant to buy a home for more than it’s worth because it means you’re getting a bad deal.
Here are your options if the home appraises for less than expected.
Renegotiate with the seller
It may be worth renegotiating with the seller if you receive a low appraisal.
“The most straightforward option is to go back to the seller and negotiate a lower price based on the appraised value,” says James Anderson, CEO of Veritas Buyers, a homebuying company in Huntsville, Alabama. “The seller may be willing to reduce the price if they are eager to sell, but this isn’t guaranteed, especially in a seller’s market.”
Dispute the home appraisal
Appraisers can make mistakes, and there are many subjective factors that affect a home’s value — appraisals are an opinion, after all. If you notice a factual error in the appraiser’s report, let them know. But if you feel that they unfairly assessed something, consider visiting the Appraisal Complaint National Hotline for information on how to file a complaint.
Get a second appraisal
You can ask your lender to order another appraisal and receive a second opinion. Keep in mind that your lender isn’t obligated to do this. But if the second appraisal comes in higher, the lender may be willing to offer you the loan.
According to Fannie Mae, lenders must follow some rules if a second appraisal is conducted. These rules dictate that lenders must select the most reliable and accurate appraisal — not just the appraisal with the highest value. They also require that lenders document the reason for selecting the appraisal.
Search for a new lender
If one lender isn’t willing to offer a loan based on a low appraisal, you can look for a new lender that will. If you secure a new lender, you’ll likely be offered a loan with a new mortgage interest rate and different fees, and you may need to provide a larger down payment.
Cancel the deal using the appraisal contingency
Appraisal contingencies let you back out of buying a house without penalty if the home doesn’t appraise for the amount specified in the contingency. If you included one in your purchase and sale agreement and you fail to renegotiate with the seller, then you can cancel the deal.
Cover the appraisal gap out of pocket
If financially feasible, you can cover the appraisal gap out of pocket. For example, if you offer $250,000 to buy a home and it appraises for $240,000, you can typically still get financing if you add $10,000 to your down payment.
Shift down payment funds
If you’re offering more money down — such as 20% — you can shift some of those funds to cover the appraisal gap. Keep in mind that a smaller down payment typically results in higher interest rates, can affect the odds of your mortgage getting approved, and means paying for private mortgage insurance if you put less than 20% down.
Sellers: What To Do When the Home Appraisal Is Lower Than the Offer
Dispute the appraisal
Like buyers, sellers can dispute the appraisal if there’s a potential error. Ask for a copy of the appraisal, examine it for errors, and look at comps.
Get a second appraisal
Aside from disputing the appraisal, you can get another opinion. You’ll likely have to pay for a second appraisal, but if it comes back higher, you can show the result to the buyer and their lender. Keep in mind that doesn’t mean they’ll take it over the first appraisal.
Reduce your asking price
If you’re willing to lower the price of your home to meet the appraisal value, that will eliminate the appraisal gap and help the deal go through.
Negotiate with the buyer
If you don’t want to lower the asking price of your home, you can still negotiate with the buyer to find a mutually agreeable resolution. For example, you could offer to cover some of their closing costs, include specific furniture items in the sale, or pay for some necessary repair costs.
Remove the listing and make home improvements
Home improvements can help boost the property’s value, but making them will require you to remove the listing and potentially back out of a deal. If you back out after accepting a buyer’s offer and there are no contingencies protecting the seller in the purchase and sale agreement, you could face legal consequences.
Tips for Preparing For a Home Appraisal
While buyers and sellers have ways to deal with an appraisal gap, it’s not an ideal situation to be in. Here are steps you can take to prepare for a smooth home appraisal.
If you’re buying a home, you want to make sure you aren’t overpaying. Here are some tips for buyers to prepare for an appraisal:
- Research comps. Apprasiers aren’t the only ones who should do their research. By researching comps, you’ll have a better idea of what to expect from the appraisal and be better equipped to spot errors once you receive the report.
- Know how quickly the local market is moving. During the COVID-19 pandemic, a fast-moving market meant that data on comps couldn’t keep up with how fast houses were appreciating. Knowing if it’s a hot or cold market — through online research or asking your real estate agent — can inform your assessment of the appraisal and whether it was based on outdated data.
- Understand your options. If you receive an appraisal that’s lower than your offer, it’s good to know your options beforehand so you can act swiftly.
- Conduct the appraisal in a timely manner. The appraisal will give you valuable information on your homebuying budget and how to proceed with your purchase. The sooner you can receive this information, the more time you’ll have to order another appraisal if problems crop up.
- Choose a qualified appraiser. Getting a qualified appraiser will help you receive an accurate appraisal and decrease the likelihood that you’ll run into problems.
If you’re selling your home, avoiding an appraisal gap is in your best interest. Use these tips to help get a higher appraisal:
- Clean and declutter the house. Homes that look warm and inviting are more appealing than messy or cluttered homes. If the appraiser is doing an in-person appraisal, this prep work can only positively influence the appraisal — and make the appraisal go quicker.
- Complete repairs before the appraisal. A home that needs maintenance or repairs will be worth less than one that is in good condition. If you can fix issues before the appraiser comes, it will lead to a higher appraisal.
- Make sure the appraiser has easy access. If the appraiser can’t come into your home and examine it closely, they’ll have to rely on listing photos and property records, which may make it harder for them to properly value your home — especially if you’ve made recent changes.
- Be present during the appraisal. If you’re present, you can answer the appraiser’s questions and help them better assess your home’s value. Don’t get in their way, but be ready to fill in the blanks or offer explanations.
- Make a list of updates or renovations. If you’ve completed recent updates or renovations that improve your home’s value, put together a list for the appraiser — especially if they’re not reflected in property records.
- Let the appraiser know of multiple offers. If you tell the appraiser you have multiple offers, that can indicate high demand at your listed price, which could lead to a higher appraisal.
Should Buyers Pay More Than the Appraised Value?
Even if your lender is willing to continue with the mortgage or you made a cash offer, it’s worth thinking about whether paying more than the appraised value makes sense. After all, it means you’re overpaying for the home. It isn’t always a bad idea, but it’s important to consider carefully.
Factors to consider
When deciding whether to pay more than the appraised value for a home, consider these factors:
- How big is the appraisal gap?
- How much do you like the home?
- Could issues that can easily be fixed down the line — like shoddy landscaping — have driven down the home’s value?
- Could you afford to sell at a lower price than you’re paying if necessary?
What To Do If the Home Appraisal Is Higher Than the Offer
In some cases, a home might appraise for a higher value than the buyer offered.
As a buyer, this is good news. It means you’re getting a good deal on the home because you’re buying it for less than it’s worth.
“If the home appraised for more than the contract purchase price, consider it a win,” says Chuck Vander Stelt, a Realtor based in Valparaiso, Indiana. “Continue forward with the purchase and keep this information to yourself.”
For sellers, this isn’t a great position, but there may not be much you can do.
“The buyer is not obligated to tell the seller the appraised value when it is higher than the contract purchase price. The seller does not get to increase the contract purchase price they accept simply because the home appraised for a higher value,” he says.
If the seller attempts to back out, it can open them up to legal trouble — like a lawsuit from the buyer.
The Bottom Line on Low Home Appraisals
If a home appraises for lower than the offered amount, it can slow down the transaction, but it doesn’t immediately doom the sale. If the buyer and seller are motivated, there are many ways to mitigate a low appraisal. However, it’s important to make sure you’re still happy with the transaction and to consider the disadvantages of moving forward with a home purchase after recieving a low appraisal.