When Your Appraisal Comes In Lower Than The Contract Price

Hello. I wanted to discuss what happens when you’re buying a house and the appraisal comes in lower than the contract price. The answer on what to do next depends on if you have a appraisal contingency in your contract or not. If you do, then you get to potentially renegotiate the deal.

An example

Let’s take a round number and say that the appraisal comes in at $480,000. And the contract price was $500,000. You can write up an addendum and tell the seller effectively, “Sorry, the appraisal came in at 480. I know we’re under contract for 500. But I would like to amend the price to 480.” They can sign it, they can reject it. They can counter-offer and say maybe 490, split the difference. In which case you would come up with $10,000 in cash between the 480 appraisal price and the 490 new amended contract price. Because let’s say you’re getting an 80% loan to value 20% down, the lender is only going to lend you 80% of the lower of the contract price or the appraisal.

So, if it appraises at 480, they’re only going to lend you 80% of 480. You’ve got to pay the difference between the 480 and this hypothetical amended price of 490 in cash. You would come up with an extra $10,000 in cash. This is above and beyond your 20% down in your closing costs in that hypothetical scenario. If all parties can’t agree and you’ve got your appraisal contingency, then the deal would become void. You would sign something voiding the deal. The seller would sign, and you would get your earnest money deposit back because the deal didn’t work out and you had that appraisal contingency.

If you don’t have an appraisal contingency

If you don’t have an appraisal contingency, you’ve waived your right to counter-offer if the appraisal comes in low. So in essence whatever the appraisal comes in at, it doesn’t matter. You have to make up the difference if it appraises low below the contract price, with cash. That’s what you’re telling the seller.

“Hey, I’m going to give you 500 even though you’re only asking 470, and I’ll waive my appraisal contingency.” That’s an aggressive move, saying, “I’m going to buy this house no matter what.” If it only appraises at 470 or 480, and I’m getting an 80% loan-to-value loan with 20% down. You’re telling the seller, “I’ll make up the difference between the low appraisal if it happens that way, and the contract price and additional cash from me as the buyer.”

Have extra cash ready in case the appraisal comes in lower than the contract price

To summarize, if you don’t have an appraisal contingency, you should have some backup cash. Whether you have it already or if you’re going to get it in gift money perhaps from a relative. Just make sure you’ve got backup cash and be prepared if the property appraises low. And then if you do have an appraisal contingency, you can void the deal, you can re-negotiate, or you can choose to pay the whole difference. Maybe you counter the seller, and the seller says, “No. You’ve offered to pay 500, I know it’s appraised at 480. I don’t care, you’re going to pay 500 or you’re not going to get the house.” But then you have a tough decision to make. Or maybe it isn’t so tough. Maybe, “Gosh, we’ve been looking for six months, we love this house.”

Are we really paying more if the home appraises low?

When you pay an appraisal shortage it’s important to remember, it’s not necessarily that you’re over-paying. And it’s not that you’re paying extra if you have to pay for an appraisal shortage.

For example, it’s not like somebody just came to you and said, “Your title insurance, which was going to be $5000, is now $25,000.” Well, that’s an extra expense. That is extra money. But if somebody comes to you and says, “Your home is appraised low, seller is not going to re-negotiate.” Maybe you don’t have an appraisal contingency to re-negotiate with. You’ve got to come up with an extra 20. Well, it’s an extra $20,000 in equity. It’s not a $20,000 cost. Technically, it’s an extra equity stake. You’ll get it back some day when you sell the house. Unlike an extra expense, which is money down the drain.

On a personal note, when I bought my house it did not appraise to the tune of $17,000. And the seller said, “Don’t care, you’re going to pay what you agreed to pay or you’re not going to buy my house.” And we had been looking for, in my case, it was two years. Really wanted the house. And I had an appraisal contingency. But I got it, I got where they were coming from.

Does an appraiser have perfect knowledge?

I paid the difference and moved on. I wasn’t going to look for another week, another month, another year, I was done and I wanted that house, and I got it. And it’s the house I’m in now. Another thing to think about with appraisals coming up short. If a house is under contract at $500,000, it appraises at $480,000, does it mean it’s worth 480? What if there was three other offers hot on your heels at 490 and 495? They thought it was worth close to 500. You said 500. Just because an appraiser says 480 or 490 or whatever, it doesn’t mean that that’s the number. That’s one person’s opinion. Let’s not forget that assessing the value of anything, certainly real estate, is an opinion. It’s a grey area. It’s an art, it’s not a science. So, it doesn’t mean you’re getting taken advantage of.

Appraisals are imperfect by design

It’s important to remember appraisals are backwards looking documents. Appraisers are going to go out and look at settled sales. Homes that have sold recently. There are rules. They prefer comparable sales to be within six months. Fannie Mae and Freddie Mac and all the government agencies that write the mortgage guidelines, they’ll allow an appraiser to go back a year. They don’t prefer it, but they’ll allow it. So, especially in a hot market where things are moving quickly and prices are escalating, if you’re going back three, six months, eight, nine, 10 months, 12 months, it’s hard to support a $500,000 purchase price with old data. That’s another reason to maybe shrug your shoulders. And if you’ve got the cash, and if you can work it out, or if you can get gift money, just pay the difference and move on. It doesn’t mean you’re getting taken advantage of. it doesn’t mean you’re over-paying, it just maybe means that the data wasn’t there to support the price that you’re paying.

What happens after you buy?

Now, when you go to settlement at $500,000, other people in your neighborhood trying to sell can now use your home as a comp. So they would owe you a thank you. Unfortunately, maybe nobody settled recently enough in your area at or near $500,000 to help you have a comp in your appraisal. So it’s a really complicated discussion, assessing value, how to handle a low appraisal. Hopefully, this gives you some answers. Both when you have an appraisal contingency and when you do not. And of course, reach out to me with any questions if there’s something that you have a question on that I haven’t covered. Happy to discuss. Thanks for watching.

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