How to Handle Low Appraisals as a Buyer or Seller

When buying or selling a home, one of the key factors in finalizing a deal is the appraisal. A home appraisal is an unbiased estimate of the property's value, conducted by a professional appraiser. This process is particularly important because it helps lenders determine how much they're willing to lend in the case of a mortgage loan. But what happens when the appraisal comes back lower than expected? A low appraisal can create challenges for both buyers and sellers, but it doesn't have to mean the end of the transaction. Understanding how to handle this situation can make a significant difference in successfully navigating the process.

In this blog post, we'll walk through the best ways to handle a low appraisal whether you're a buyer or a seller. We’ll cover practical tips for both parties, so you’re prepared to respond effectively and keep your deal on track.

What Happens When an Appraisal is Low?

Before diving into specific solutions, it’s essential to understand why a low appraisal can pose a problem. The appraisal figure is used by lenders to determine how much money they are willing to lend. If the appraisal comes in lower than the agreed-upon purchase price, the buyer’s lender may refuse to provide a loan for the full amount. This situation can result in one of the following:

● Buyers will have to come up with the difference in cash.

● Sellers may have to reduce their price.

● The deal may fall through entirely if a resolution isn't reached.

For both buyers and sellers, the key is to manage the situation proactively and strategically.

Tips for Buyers When the Appraisal Comes in Low

1. Review the Appraisal Report Carefully

As a buyer, the first step you should take when faced with a low appraisal is to thoroughly review the appraisal report. Look at the appraiser's reasoning, particularly the properties they used for comparison. If you find discrepancies or if the appraiser overlooked certain features that could justify the home's value (e.g., recent upgrades, a larger lot, or better location), it may be worth disputing the appraisal.

2. Consider Renegotiating the Price

If the appraisal is significantly lower than the agreed price, consider negotiating with the seller. The buyer can ask the seller to lower the price to match the appraisal or to meet halfway. This is often a viable option, especially if the buyer is still very interested in the home and the seller is motivated to sell.

3. Bring Additional Cash to the Table

In some cases, the lender will only offer financing based on the appraised value. As a buyer, you can make up the difference by bringing extra cash to closing. This is a practical option if you're financially capable of doing so, and it allows the deal to proceed without requiring the seller to reduce the price.

4. Look Into the Possibility of a Second Appraisal

If you believe the first appraisal was flawed or incomplete, you might have the option to request a second appraisal. However, this will often come at an additional cost, and your lender may not always approve it. But if you strongly believe the initial appraisal was incorrect, it's worth discussing this with your lender.

5. Consider Other Loan Options

If your lender won’t budge and you can’t make up the difference in cash, it may be helpful to explore other loan options. Different types of loans may have varying policies on appraisals, so you might be able to find a more flexible lender who will offer better terms or approve your loan for the appraised value.

Tips for Sellers When the Appraisal Comes in Low

1. Stay Calm and Be Flexible

It’s understandable that a low appraisal can be frustrating as a seller, especially if you’ve already mentally accounted for the higher price. However, it's important to remain calm and be prepared to negotiate. Buyers may be hesitant to proceed with the sale, and being flexible can open up the conversation for solutions that work for everyone.

2. Review the Appraisal Report for Errors

Just like buyers, sellers should also take a close look at the appraisal report. If you find any errors or oversights, such as outdated comparables or the failure to factor in improvements you've made to the property, bring these issues to the attention of your agent and the appraiser. A mistake could be the reason for the low appraisal, and it may be possible to have it corrected.

3. Consider Lowering Your Price

If the appraisal is lower than expected, the most straightforward solution is often to lower the price. This can keep the deal moving forward, especially if you’re dealing with an interested buyer who’s already put in the work. If you’re willing to lower the price, you might still be able to close the sale quickly, even if it's less than you initially hoped for.

4. Offer Seller Financing

In rare situations, if the buyer has trouble securing financing due to the low appraisal, you could offer seller financing. This can be an effective solution if the buyer is still committed to the deal, but the appraisal issue prevents them from getting approved for the full mortgage. It’s an option that may require negotiation, but it could be a win-win for both parties if handled properly.

5. Prepare for the Possibility of the Deal Falling Through

Despite your best efforts, sometimes a low appraisal means the deal just won’t work out. If the buyer can’t secure enough financing and you’re unwilling to lower the price, it might be time to walk away. While this can be disheartening, it’s better to move on than to accept an offer that doesn't meet your financial expectations.

How to Avoid Appraisal Problems in the Future

While it’s impossible to completely eliminate the risk of a low appraisal, there are steps both buyers and sellers can take to mitigate the likelihood of one.

For Buyers:

● Do Your Research: Before submitting an offer, research comparable properties in the area to get an idea of what homes are selling for. This can help you avoid overpaying and help ensure your offer aligns with the market.

● Get Pre-Approved for a Loan: A pre-approval letter from your lender can help you understand how much the bank is willing to lend based on your financial profile and the value of the home.

For Sellers:

● Highlight the Property’s Strengths: Make sure to highlight upgrades and improvements to your home during the appraisal process. These may not be immediately obvious to the appraiser, but they could significantly add to the property's value.

● Choose the Right Agent: A skilled real estate agent can help set a realistic price for your home that reflects market conditions and minimizes the risk of an appraisal issue.

Conclusion

Handling a low appraisal as a buyer or seller is a common hurdle in real estate transactions, but it doesn’t have to derail the entire process. By understanding your options—whether it's negotiating a new price, offering to bring extra cash to the table, or challenging the appraisal—you can take steps to keep your deal alive. For sellers, being open to flexibility and reviewing the appraisal for errors can also be key to keeping negotiations moving forward. Ultimately, staying calm, informed, and proactive is your best strategy for navigating this challenge successfully.

If you’ve had to deal with a low appraisal or want to learn more about navigating complex real-estate transactions, stay connected for more tips, insights, and strategies.