While this is indeed one of the most frequently asked questions we get – especially from homeowners – it’s not a new topic to our blog. I’ve written about it a few times over the years, but since the question keeps popping up, I’ll keep writing about it!
As I’ve written about this topic before, and my goal is to keep these posts fairly short, I’ll just cover the basics here.
When your a home appraises for less than contract price, the deal isn’t always dead. In fact, most parties have three options, and we’ll look at each of those briefly.
I’m writing this in the first quarter of 2023 when most markets are in a sort of correction period, or declining, or softening, or whatever term you want to use. Sellers rode the crazy wave of 2021-2022 and got astronomical amounts for their homes. Unfortunately, some sellers are still stuck in 2022 in their minds, and they think they should still be able to get a huge premium for their home. So, they price it way too high and may even get a buyer. But in this particular market, a lot of homes are appraising under contract price again, so this scenario may come up more than most would like.
Three Options For Every Homeowner When The Appraisal Comes Back Under Contract Price
Before we get to your options, though, I want to point out the language I’m using. It’s intentional. Notice that I didn’t write What to do when the appraisal comes in low. Low is a relative term, and it indicates that the appraised value is incorrect. “The contract price was market value, and the appraisal came back under the contract price, therefore the appraisal is low”. This kind of language – although used especially by Realtors everywhere – doesn’t lend itself to thoughtful and helpful conversations. The appraiser doesn’t have a target to hit (although we are aware of the contract price), so in a very real sense, an appraisal can never come in ‘low’.
Option 1: Lower the contract price to the appraised value.
Sometimes, if the difference in contract price and appraised value is minimal, a seller will simply lower the contract price to reflect the appraisal. Say your listing was under contract at $225,000 and the appraisal came back at $215,000. Maybe the seller just lowers the price to $215,000 to get the deal done. They take less than they thought they were going to get, the buyer gets the home for a price they’re comfortable with. The home is sold. Everyone moves on. And everyone is (mostly) happy.
Option 2. The buyer comes out of pocket for the difference.
Sometimes a seller won’t budge off the contract price, even after an appraisal comes in below contract. I’m the seller, and we agreed to $400,000, and I won’t take one single penny less!
Now if the buyer is obtaining financing in order to purchase the home, the bank will likely only be lending a percentage of the appraised value. If the contract price is $100,000, and it appraises at $100,000, and the bank lends 80% of that, then the buyer has $80,000 from the bank and has to come up with a $20,000 down payment.
But suppose the home only appraises for $90,000. Now, the lender will only loan $72,000 ($90,000 x 80%). That means if the seller isn’t willing to lower the price, the purchaser has to pony up an additional cash on top of the 20 grand they were originally expecting to pay. That could be a deal breaker for some.
Option 3. The sale is canceled.
This is the worst-case scenario. The seller won’t budge, and the buyer is strapped for cash. So what happens? If a meeting of the minds can’t be reached, the contract simply gets voided, and the seller looks for another buyer, while the purchaser looks for another home.
If you’d rather not go through any of these options, you could always try your hand at a reconsideration of value, or ROV. Not every financial institution allows reconsiderations of value, so make sure you check with the lender, and find out their protocol before going too far.
If you have a question you’d like us to feature, email me at email@example.com
For more information on this and other topics related to the appraisal process, check out our Guide To Appraisals set of E-Books at https://riverfrontappraisals.com/guides/.