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My Appraisal Came In Lower Than The Purchase Price, Now What?

Certified Mortgage Advisor
NMLS 1701021
November 21, 2019

When appraisal came in lower, how to we fix it?

What happens if the appraised value of your property or the property that you're buying comes in low? So first of all, take a deep breath. Relax. It's going to be okay. Most of the time I see appraisals come in lower than the purchase price, only about 10% of the time do I see those deals get canceled. Most of the time they get worked out and we're going to walk through five different remedies to resolve a short appraisal.

Importance of appraisal

So first of all, why is an appraisal even necessary? Why is it driving a majority of the transaction? The reason why it's doing this is because the appraisal is there mainly for when the buyer has the financing to purchase a home, and the appraisals for the lender to make sure that they're not lending more than the home is worth. In the event that there's ever a foreclosure.

This is to secure the lender

They want to make sure that their money is safe and secured by that home, and it's a value. So an appraisal is needed if your buyer is using financing. If they're using cash, then the appraisal really doesn't matter unless there's an appraisal contingency in the contract. So the appraisal matters to the lender. It's the only way to get the deal closed. If there's financing on the deal.

So why might the appraisal have come in short?

Normally most of the time, what happens is this is because of the market. So if you're in a really strong seller's market, that means that prices are going up. Because there are not a lot of homes available. So a seller's market tends to happen if you have a lot of overpriced homes. Eventually, the market gets to the point where homes continued to be overpriced and appraisers corrected that by using more steady data than just the rising market data. So that's probably what happened.

We cannot have a second appraisal

There are a couple of other reasons you might have an appraiser who maybe just uses comps that may not have been the best. Again, that's subjective. But you might have an inexperienced appraiser. Unfortunately, there's no way to pick the appraiser or have a second one redone. Once you have that one appraiser, or what appraisal done. That's it.

Switch lender for a second appraisal

The only way to get another appraisal on a conventional loan would be to switch lenders. If you're using a government-backed loan, you're just out of luck that appraisal is going to be stuck with a property for six months, no matter who buys him. So let's talk about five main solutions that you can use to remedy a low appraisal.

What is low appraisal?

So let's first talk about what we're talking about, and what we mean by a low appraisal. Let's say that up here, we have our purchase price. And let's say our purchase price is $200,000. So you go under contract for $200,000 either. You're the seller and selling it for 200 or you're the buyer and buying it for 200. Okay. And then let's say an appraisal happens and it comes back and that appraisal value is now 180. So it hits 180 and now there's this 20 grand gap that needs to be made up. The appraiser is basically saying the contract is overpriced at $20,000 and we need to find a remedy for that.

Solution 1: Make up the difference

So solution number one is to make up the difference. So if you're the buyer, this is where you're going to come down that full amount. So if this was $200,000 and it came in at, let's say at 190, Then this spread here is $10,000. So that means as the buyer you'd bring an extra $10,000 to the table on top of what you're already paying for your down payment and your closing costs.

Extra money if minimum down

Now, some ways that you can separate this a little bit is this is only if you're paying the minimum down payment. So let's say you're paying the minimum down payment right now, then you'd have to bring this extra money to the closing table.

If you're already putting a lot of money down, let's say you're already putting $50,000 down. Then what you can do is you can just subtract that 10,000 from the 50. So if you're on your $200,000 house, you're bringing $50,000 down and it shorter praises, 10,000, instead of bringing $50,000 down, you're going to bring $40,000 down and $10,000 for the appraisal difference. Your down payment is going to come down a little bit, but you'll bring the same money to the table.

The only people this really affects is when you're not able to pull that shortage out of your down payment funds, which happens for a lot of people because most people are putting the minimum down. So that is if you make up the difference.

Solution 2: Get a price reduction

Another option is to get a price reduction. A price reduction is where you're going to ask the seller to come down pretty much the entire amount. So again if we had a $200,000 house and you wanted a price reduction, let's say it appraised at a 195, then you would ask the seller for $5,000.

So the seller would then basically come off the purchase price $5,000. You would write an addendum to the contract saying that the new purchase price is $195,000. And then you'd be good to go.

Meet in the middle ground

Now that one's a little bit difficult to do normally because obviously, the seller doesn't want to come down. Most likely as a buyer, you don't want to come up. So a good middle ground is to split the difference. And splitting the difference is basically where you're doing a very similar scenario as one and two, but you're just splitting the two and a half.

So, this is especially prominent on more short appraisals. So let's say your purchase price is 200 and it gets short down to 180. Our gap here is $20,000. So the buyer doesn't want to come up with 20,000. The seller doesn't want to come down to 20,000. So the remedy is the buyer's going to basically bring the extra 10,000. The seller is going to take off 10,000 from the purchase price. So they're meeting in the middle. That's how they're splitting the difference here.

So however much your difference is let's say it shorts $30,000. Then the buyer's going to bring 15,000. The seller is going to come down to 15,000.

Solution 4: Challenge the appraisal

Another option that you have is to challenge the appraisal. This is super difficult. I have done a few challenges and I've only ever seen an appraiser change the value once, and he only changed by a thousand dollars.

Not all appraiser will accept challenges of the value

Most of the time, you're just not going to find an appraiser who is going to accept a challenge of the value. So if you do get your appraisal back and it's short, you can have the lender challenge it, and what it'll do is ask the listing agent for comparable homes to use instead of the comps that they appraise are used.

Challenges is still a thing but there's no guarantee

Normally what's going to happen is the appraiser's going to review it, come back and say, no, the comps that I provided were solid and they're going to disregard whatever was sent. It's normally what happens just something to expect. You can do it. There is a possibility that it could happen, but it's just a super low chance that's ever going to work.

Agent's can do extra mile

Something that you can do to mitigate an appraiser using comps that you might not want, or maybe you have comps that you think are going to be really solid. And this is something more for your agent. Your agent can actually set comps at the house before the appraiser comes to the property.

So the appraiser can go and see here's where here are the comps that we're using to base the purchase price on. And this isn't swaying the appraiser in any way. This is not illegal. This is an ethical way to say, this is how we are supporting the purchase price of the property. And I think that the listing agent should be doing this anyway.

If you have a listing agent, your listing agent is the person who should have the data support for the backing of the purchase price. And so something that they can do, that's very easy is just to print out some comps, set them on the table. So when the appraiser gets there, they can see, that this is how we're arriving at this value.

Otherwise, an appraiser's walking into the home and they don't know what the story of the home is. Maybe they don't know what repairs were made or improvements that were made to the home. A listing agent can set out comps of where they're getting to that purchase price along with any data about repairs or improvements or things that are increasing the value of comps to support it.

Solution 5: Cancel the deal

Last but not least is to cancel the deal. This only happens 10% of the time. It doesn't happen that often, but really the appraisal is there to protect the lender, but it's also there to protect the buyer. The only person that really doesn't benefit is the seller because the seller obviously wants to sell the house for as much money as possible. And then they don't have to worry about the home anymore.

As the buyer, the appraisal really does protect you if it comes in short. And the reason why is because they're making sure that you're not overpaying for the property. This is disappointing if you ever get to the point in the deal where you have to cancel it because of a short appraisal, but it really is protecting, making sure that you're not overpaying. You don't want to overpay for a house. There's no home worth immediately being negative equity on a property.

Unless you can justify its value. Appraisals are normally pretty solid. They're going to be pretty rock solid over a good period of time until the market shifts quite a bit later in the future.

Move on and soon you'll find something better

So if you have to back out, it's going to be disappointing. You're allowed to grieve it, but you're probably going to find something even better. That's what seems to always happen. Anytime I have buyers that they either have inspections that go wrong or they have appraisals that go wrong. If they ever cut their losses and find something else, they end up finding something that was even better. It just seems to work out that way.

Create a team and a game plan

So all in all, if you do have a short appraisal, there are remedies. The best thing that you want to do is talk to your lender, talk to your realtor, come up with a game plan, have them show you some options, and see what it will look like. See what it would look like. If you made up the difference, see what it would look like if you got a price reduction. See what it would look like if you split the difference and then go to the seller and see what you can do to negotiate and figure out the best plan moving forward.

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Kyle Andrew Seagraves is Federal Mortgage Loan Originator (NMLS 1701021) licensed in all 50 states with the Dan Frio Team at Allied First Bank (NMLS 203463), an Equal Housing Lender. Separately, Kyle owns Win The House You Love LLC, an education company. Win The House You Love LLC is not a lender, does not issue loan qualifications, and does not extend credit of any kind. This website is only for educational usage. All calculations should be verified independently. This website is not an offer to lend and should not directly be used to make decisions on home offers, purchasing decisions, nor loan selections. Not guaranteed to provide accurate results, imply lending terms, qualification amounts, nor real estate advice. Seek counsel from a licensed real estate agent, loan originator, financial planner, accountant, and/or attorney for real estate, legal, and/or financial advice.

Servbank is not affiliated with the VA, FHA or any other government agency. This site has not been approved by any government agency.
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