What Happens If the Appraisal Comes in Low?

For a financed purchase, the lender generally considers the property's appraised value when determining how much it is willing to lend.

For example, suppose:

• Purchase price: $500,000

• Appraised value: $480,000

There is a $20,000 difference between the purchase price and the appraised value.

That does not automatically determine who pays the difference. The contract and loan terms matter.

Depending on the circumstances, several possibilities may exist.

The Buyer May Bring Additional Cash

A buyer may decide to contribute additional funds toward the difference, if permitted and financially appropriate.

Whether this is possible and how it affects the loan depends on the lender and loan program.

The Seller May Agree to Reduce the Price

The buyer and seller may negotiate a lower purchase price.

The seller is not automatically required to reduce the price simply because the appraisal is lower.

The Parties May Find Another Solution

The parties may negotiate other changes to the transaction, depending on the contract and circumstances.

For example, they could discuss a combination of price changes and additional buyer funds.

The Buyer May Have Contractual Options

Some purchase agreements contain appraisal provisions that provide the buyer with specific rights if the appraisal is below the purchase price.

Those rights vary by contract and state.

The exact wording of the appraisal provision matters.

An appraisal and inspection serve different purposes.

An appraisal generally addresses the property's value for a particular purpose, often lending.

An inspection focuses on the condition and components of the property.

A house can have a satisfactory inspection but still receive a low appraisal. Likewise, a property can appraise at or above the purchase price while an inspection reveals significant repair concerns.

An appraisal is an important part of many financed transactions, but it is not simply a statement that a buyer's agreed price is "right" or "wrong."

The appraiser evaluates the property using applicable appraisal methods and available market information.

The buyer's contract, lender requirements, and the circumstances of the transaction still need to be considered.

First, understand exactly what the appraisal says and what the purchase contract provides.

Then determine:

• How large the appraisal gap is

• What your lender will finance

• Whether you have an appraisal contingency or other contractual protection

• Whether additional cash is an option

• Whether the seller is willing to renegotiate

• What deadlines apply

Avoid making a decision based solely on the appraisal number without looking at the entire transaction.

The appraisal itself provides information. The purchase contract determines many of the rightsand obligations that follow.

That is why reviewing the appraisal provision before an issue occurs can be just as important asknowing what the property appraises for.