It's a scenario I've witnessed firsthand several times in the past few months. Buyers find home they love, submit their best offer, successfully negotiate with the seller, and have a signed contract. Everything is on track, until... the appraisal comes in for less than the amount they've agreed to pay for the home. What now?

dollar signIn the housing market of old (circa-2006) appraisals weren't a huge source of worry. They generally came back at, or sometimes even higher than, the selling price of the house. Not so much today. In the current housing market, both buyers and sellers may find themselves anxiously awaiting the status of the appraisal and, thus, the fate of their deal.

In the case of a low appraisal, the options are better for a buyer than a seller, and may even work in your favor - although not without a headache or two. Here's what you can do as a buyer if your appraisal come in low:

Write in a contingency clause. This is the most important thing you can do to combat a low appraisal and it should occur BEFORE the appraisal is even conducted. Your real estate agent should protect you with a contingency clause in the sales contract stating that the transaction can be terminated if the home doesn’t appraise at, or above, the sales price. A properly written loan contingency allows you, the buyer, to cancel the contract and requires the seller to return your earnest money deposit. Double check with your agent to be sure the contingency clause is included in the contract before submitting an offer!

Ask the seller to lower the price of the home to match the appraisal amount. No, this isn't crazy talk! It's actually the is the easiest, most common solution to a low appraisal. And if you think a seller is unlikely to agree to this demand, think again.  Any serious seller knows to hang on to a serious buyer if at all possible. There are many disadvantages to nullifying the contract and relisting the home, including lost time, the possibility of an even lower appraisal with a subsequent contract, or the very real possibility of no new offers - at all. In the long run, the seller is likely to realize he or she will save money by lowering the purchase price and closing the deal.

You, the buyer, can make up in cash the difference between the purchase price and the appraised value of the home. But are you really willing, or able to do this? In most cases, probably not. Consider also that a low appraisal changes the loan-to-value-ratio of your loan. Which changes how much a lender is willing to loan, which changes your downpayment amount if you decide to go with the higher purchase price rather than the lower appraised value.

A contract purchase price of $200,000 with 10% down in cash and a 90% loan from your lender means you will need $10,000 at closing for a downpayment.
An appraisal amount of $180,000 instead of the original $200,000 sales price means the lender will only lend 90% of the appraisal price, which would be $162,000. Which means that if you, the buyer, really, really want the house and are willing to pay the original $200,000 sales price, you will now need to put $38,000 down instead of the original $20,000. And that's in addition to the cash needed to make up the difference between the contract purchase price and the appraised value. A good deal? Not so much.

Dispute the appraisal. Do you think the appraiser got it wrong? If you are confident that the contract sales price accurately reflects the property's value based on a Comparable Market Analysis (CMA) prepared by your real estate agent, then gather your facts and prepare to battle! Important questions to ask when disputing an appraisal are:

  • Who did the appraisal? If it was conducted by an out-of-town appraiser unfamiliar with your real estate market, you have the right to request a new appraisal.
  • What comparables were used? Ask your real estate agent for a list of recent comparable sales that justify the agreed-to sales price. Submit that list to the underwriter and ask for a review of the appraisal. 

Order your own, independent appraisal. An appraisal can cost several hundred dollars, so be sure it's worth the extra money before you go this route. This can work in your favor IF: 1. the new appraisal comes back at, or higher than, the contract purchase price and 2. the bank agrees with the new appraisal.

If all else fails, you can simply walk away knowing there are plenty more homes out there!