A low appraisal does not automatically mean the seller has to lower the price, the buyer has to cover the entire difference, or the deal is dead.
It means there is a value problem to work through.
What happens next depends on whether there is good reason to question the appraisal, what the buyer's contract allows, the financing involved, the current market, the size of the gap, and the buyer's finances.
First, Raylene reviews the appraisal to see whether there is a legitimate reason to argue for more value.
Are the comparable sales really comparable? Are they similar in size, acreage, location, amenities, finishes, and condition? Is something about the property missing or described incorrectly? Were there other closed sales that might better support the contract price?
This can be especially important with rural and acreage properties. Sometimes there simply aren't three nearly identical homes conveniently sitting down the road waiting to become appraisal comps.
If there are solid comparable sales or property details that may support a higher value, that information can be gathered and submitted through the lender's reconsideration process. The seller's agent may also have supporting sales, upgrades, or property information worth reviewing.
That doesn't mean every low appraisal should be challenged. Sometimes the appraisal is well supported.
If the value doesn't change, then the conversation turns to what the buyer's options actually are.
Building a home? See Why Staying Within a Builder's Budget Does Not Guarantee a Home Will Appraise.
No.
This is one of the biggest misunderstandings buyers have about a low appraisal.
The appraisal does not automatically change the contract price. The seller can agree to lower the price, but the seller isn't required to do so simply because the appraisal came in lower.
If the value remains unchanged, there are several possible ways forward.
The seller may reduce the price. The buyer may choose to cover some or all of the difference. The parties may negotiate somewhere in between or adjust other terms. Depending on the contract and financing, the buyer may also have a right to terminate.
Which solution is realistic often has a lot to do with the market and the buyer's finances.
In a strong seller's market where homes are receiving multiple offers, buyers may agree in advance to cover some or all of an appraisal gap in order to make their offer more competitive.
In a slower, more buyer-friendly market, a seller may be more willing to reduce the price. Starting over with another buyer means more time on the market, additional holding costs, and the possibility that the next appraisal lands in much the same place.
The appraisal creates a negotiation. It does not automatically decide who absorbs the difference.
Maybe.
A low appraisal by itself does not mean every buyer can simply cancel the contract and receive the earnest money back.
In a financed Texas purchase, the answer depends on the contract and addenda the buyer actually signed, the type of financing involved, any appraisal protection or waiver that was negotiated, and whether the applicable deadlines and requirements have been met.
A buyer may have kept full appraisal protection, agreed to cover a certain amount of an appraisal gap, waived some appraisal-related protection, or waived it entirely. FHA and VA financing can also have different appraisal provisions.
That's why the contract matters just as much as the appraisal.
Before deciding what to negotiate – or whether termination is even an option – the buyer needs to know what was agreed to before the appraisal ever happened.
Not automatically.
During the real estate boom, many buyers knowingly paid more than appraised value because competition for the home made doing so worthwhile to them.
The important part is understanding what that decision may mean later.
An appraisal is a professional opinion of market value based on the property and available market evidence at that point in time. Paying above that value doesn't automatically make the purchase a bad one, but the buyer is starting out having paid more than the appraisal currently supports.
Raylene generally recommends thinking of a home purchase as at least a four- to six-year decision if the goal is to have enough time to absorb the costs of buying and eventually selling. That isn't a guaranteed break-even date. The market, the property, financing, selling costs, and how much the buyer originally paid all matter.
Paying above the appraised value can make that runway longer.
Raylene has seen the other side of that decision as the market changed. Some homeowners who bought during a hotter seller's market and paid above appraisal are now selling in a more buyer-friendly market. In some cases, the current sales price isn't enough to cover the remaining loan balance plus the costs of selling, leaving the seller to bring money to closing.
That doesn't mean paying an appraisal gap was necessarily the wrong decision when they bought.
It does mean a buyer should understand the possible long-term effect before deciding how much extra the home is worth to them today.
First, the appraisal gets reviewed.
If there is legitimate market evidence supporting a different value, there may be reason to ask for reconsideration. If the value holds, the buyer needs to understand the financing, the contract, and the choices available before deciding what happens next.
Sometimes the seller reduces the price. Sometimes the buyer covers some or all of the difference. Sometimes the parties find a middle ground.
And sometimes the best decision is not to force the transaction to work.
A low appraisal creates a decision. It does not make the decision for the buyer.
Dealing with a low appraisal in real time? Raylene Lewis can help you review the appraisal, the contract, and the practical options in front of you.
