When buying a home, having your offer accepted is an exciting milestone. However, your home purchase isn’t final until the property appraises for at least the purchase price. A home that fails to appraise can put your home buying plans on hold.
A home appraisal is an unbiased estimate of the property’s market value. An appraiser compares the home to recent sales of similar properties in the area. If the appraiser determines the home is worth less than the price you offered, your mortgage lender won’t approve a loan for more than the appraised value. This appraisal gap can sink the deal.
Why do properties fail to appraise?
There are a few key reasons why a home might fail to appraise:
- You overpaid. In a competitive market, buyers may get caught up in bidding wars and overbid to beat competing offers. If you offer more than what comparable homes are selling for, the appraisal likely will come in lower than your offer price.
- The appraiser made a mistake. Appraisers are human, and sometimes they miss important details about the property or comparable sales that result in a low appraisal.
- Rapidly appreciating market. When home prices rise quickly, appraisals can have a hard time keeping up. If prices shot up since the recent sales the appraiser based value on, your home may be worth more than the appraisal shows.
- Poor home condition. If the home has physical problems, an appraiser will note these issues and adjust the value accordingly. Things like a leaky roof, old HVAC system, or outdated kitchen can bring down appraised value.
How to avoid an appraisal gap
While low appraisals are sometimes unavoidable, you can take steps to reduce the chances of a failed appraisal derailing your home purchase:
- Don’t overbid. It’s tempting to stretch your budget to beat competing offers, but overpaying increases the odds the home won’t appraise for your offer amount.
- Understand the market. Look at recent sales of comparable homes so you know whether your offer aligns with the current market.
- Include an appraisal contingency. This gives you the option to renegotiate or walk away if the appraisal comes in low without losing your earnest money.
- Get a pre-inspection. Inspect the home yourself or hire a professional to identify any repairs needed so you can factor them into your offer.
- Ask your agent to review the appraisal. Make sure the appraiser accounted for the home’s upgrades, unique features and recent sales in the area.
What happens when a home appraises low?
When an appraisal comes in below the agreed-upon price, there are a few possible outcomes:
- Renegotiate the price. The buyer and seller can agree to lower the price to the appraised value.
- The buyer brings more cash to cover the gap. You may need to pay the difference between the loan amount and purchase price out of pocket.
- The seller reduces the sales price. Some purchase agreements require the seller to lower the price to the appraised amount.
- Meet in the middle. Both parties compromise by splitting the appraisal gap and adjusting the price down slightly.
- Walk away from the deal. If no agreement can be reached, the buyer can cancel the sale and have their earnest money returned.
The option that works best depends on factors like how badly the buyer wants the home, how motivated the seller is to complete the sale, and the laws governing real estate transactions in your state.
Can you appeal a low appraisal?
If you believe a home appraisal is inaccurately low, you can dispute the amount through your lender. Here are some tips for appealing an appraisal:
- Ask for a copy of the appraisal report to review. Make sure the comparable properties used are valid and the information about your home is correct.
- Provide additional comps the appraiser may have overlooked. Recent sales of similar homes in better condition can counteract the impact of dated or inferior comps.
- Point out flaws in the appraiser’s logic or math. Calculation errors and faulty reasoning are grounds for reconsideration.
- Have your real estate agent draft a rebuttal letter highlighting information the appraiser failed to account for.
- Offer additional information about home upgrades and renovations since the appraiser visited.
- Request a second appraisal if the first one appears to contain major errors. You may have to pay for this additional appraisal.
It can be an uphill battle to overturn a low appraisal, but providing solid evidence the amount is off base can justify an appeal in some cases.
How much under appraisal kills a deal?
There’s no universal rule on how much of an appraisal gap will kill a deal. Even just a few thousand dollars under can torpedo an agreement if the parties refuse to negotiate. However, in general:
- 1-3% under listing price: Minor gap, deal can likely proceed with slight price adjustment.
- 3-5% under listing price: Moderate gap, will require negotiations and compromise to close.
- 5-10% under listing price: Major gap, deal at serious risk of falling through.
- Over 10% under listing price: Deal likely dead unless buyer willing and able to cover entire gap.
Sellers are usually more motivated to work through a small gap. But once the appraisal is far below the agreed price, the seller has less incentive to drop their price significantly, putting the sale in jeopardy.
How to cover an appraisal gap as the buyer
As a buyer, you have a few options to bridge the gap if a home you want to purchase appraises under the contract price:
- Request the seller lower the price. They may agree to come down to the appraised value or split the difference.
- Increase your down payment. Putting down more upfront lowers the mortgage amount to equal the appraisal.
- Pay cash for the difference. Bring extra funds beyond your down payment to cover the gap.
- Appeal the appraisal. Provide evidence to dispute the valuation and get the appraiser to reconsider.
- Ask the seller to make repairs or credits. They may fix issues that hurt appraisal value or offer credits to help cover your costs.
- Get a higher loan. Seek alternative financing that allows a higher loan-to-value ratio so you can borrow more.
Work with your lender and real estate agent to determine the best strategy. Having cash reserves gives you the most options to address an appraisal gap. But even if you don’t have extra funds, flexible sellers, creative financing, or a successful appeal can bridge the difference.
Closing on a home that appraised low
Just because a property appraises under your offer price doesn’t necessarily mean you have to scrap the deal. Here are some tips for closing on a home with a low appraisal:
- Renegotiate the price down. Most straightforward option, but depends on seller willingness to drop the price.
- Ask the seller to make repairs or offer credits equal to the gap. Allows them to keep same sale price.
- Dispute the appraisal. Supply evidence it undervalued the property to get number increased.
- Bring cash to cover the difference. Requires dipping into savings beyond the down payment.
- Get a higher loan. Seek alternative financing that will lend above the appraisal.
- Get a second appraisal. Hire another appraiser in hopes of a higher valuation.
- Split the difference. Meet the seller halfway by each party adjusting their price expectations.
Before closing with an appraisal gap, understand any risks and get all agreements for addressing the gap in writing. Work closely with your real estate agent and lender when navigating low appraisals to keep the deal on track.
Can sellers sue over a low appraisal?
Sellers rarely have grounds to sue over a low home appraisal. Some key reasons why appraisal-related lawsuits are so uncommon:
- Appraisers have extensive training and use objective data to estimate value. Low appraisals aren’t intentional or malicious.
- Mortgage lenders, not individual appraisers, decide whether to approve loans based on the appraisal amount.
- Real estate sales contracts allow buyers to cancel if a home doesn’t appraise for the purchase price.
- Appraisers are required to stick to a code of ethics. They can lose their license if they distort appraisals at a lender’s or realtor’s request.
- Lawsuits are expensive, and suing over an appraisal is hard to justify unless major errors are provable.
The best recourse for an undeservedly low appraisal is to dispute the valuation or provide additional evidence to your lender rather than pursuing legal action.
How to dispute a home appraisal
You have the right to appeal a home appraisal that you believe undervalues the property. Here are some tips to dispute an appraisal:
- Review the appraisal report for errors, flawed comps and incorrect data about the property.
- Gather additional comps the appraiser overlooked – ideally more recent sales in better condition.
- Highlight any repairs, renovations or improvements made since the appraiser visited.
- Note changes in market conditions that may impact value – lowered supply, bidding wars, etc.
- Provide evidence to correct any inaccurate facts about the home’s size, construction, condition, etc.
- Calculate adjustments the appraiser applied incorrectly that underestimate value.
- Draft a rebuttal letter summarizing the evidence the appraisal amount is wrong.
Work with your real estate agent to dispute the appraisal and send your written appeal to the lender. Provide credible evidence rather than simply stating your disagreement with the amount. A calm, fact-based appeal holds more weight.
How to ensure you get a good appraisal
While appraisals are outside your control, a few proactive steps may help influence a fair valuation of the home:
- Don’t overpay. Keep your offer realistic and in line with comps to avoid inflated expectations.
- Give the appraiser full access. Being able to fully inspect improves accuracy.
- Make minor repairs before the appraisal. Fix easy issues like leaky faucets.
- Clean and declutter before the visit. A tidy home shows better.
- Highlight upgrades and renovations. Provide a list of improvements you’ve made.
- Send comps to your lender. Suggest recent sales of similar homes for appraiser reference.
- Be flexible scheduling the appraisal. A void rushed assessments when possible.
While not guaranteed to increase your appraisal amount, proactively managing the process demonstrates you have nothing to hide and improves the odds of a fair appraised value.
How much under appraisal can you go?
There’s no universal rule dictating how much under the purchase price an appraisal can be before it kills the deal. Some general guidelines on maximum appraisal gaps:
- 1-3% under asking price: Often salvageable with minor concessions
- 3-5% under: Requires substantial negotiations but deal may still be workable
- 5-10% under: Serious appraisal gap putting the deal at high risk
- Over 10% under: Extremely challenging to overcome without the buyer covering the entire gap
Importantly, how much under the appraisal a buyer is willing to go depends on their individual financial situation. A buyer with plenty of cash reserves can go 10% under more easily than a buyer who stretched their budget just to make the offer.
What repairs help appraisal value?
Certain repairs and improvements can positively impact a home’s appraised value. Smart updates to target before an appraisal include:
- Kitchen remodel – especially cabinets, counters, appliances
- Bathroom remodels
- Flooring – replace worn carpeting, refinish hardwoods
- Exterior paint or siding
- Curb appeal upgrades – new landscaping, paved driveway
- Adding square footage – converted garage, finished basement
- Roof replacement
- Replacement windows
- Updated electrical and plumbing
- HVAC system replacement
Upgrades that are noticeable, fix deferred maintenance, or add livable space tend to positively impact appraised value. But smaller cosmetic fixes like paint touch-ups can also show a home was cared for.
How to invest $5,000 to increase appraisal
With $5,000 to spend, you can make several meaningful improvements to potentially boost your home’s appraisal value:
- Update the kitchen – Reface or paint cabinets, replace sink and faucet, install new countertops.
- Enhance curb appeal – Plant flowers and shrubs, install paver walkway, add decorative patio lights.
- Replace flooring – Install new carpeting in bedrooms or hardwood flooring in high-traffic areas.
- Remodel a bathroom – Replace fixtures, mirrors, vanity, flooring and do a fresh paint color scheme.
- Landscape the yard – Tree and shrub plantings, grading, install retaining walls, mulch beds.
- Update windows – Replace outdated or single-pane windows with energy efficient models.
A combination of smaller cosmetic updates high-ROI projects like bathroom and kitchen updates offers the best change to maximize your home’s appraised value.
Conclusion
A home failing to appraise can put your real estate transaction at risk. But being aware of the reasons for low appraisals and your options to address gaps empowers you to react and get the deal to the closing table. Remember to always dispute a low appraisal professionally using facts rather than emotions. With patience and savvy negotiating, even properties that come in under contract price can ultimately become your new home.