There’s no way around it: any home purchase financed by a mortgage involves an appraisal. This is how the bank ensures that the size of the loan isn’t greater than the value of the collateral (the house) needed for the loan.
So what happens when the appraisal comes in below the price you and the buyer have agreed upon?
This can easily happen in a competitive market, where houses frequently bring in multiple offers. On face value, multiple offers are good news for you, the seller. They often mean getting more than your original asking price. For the seller, multiple offers can feel like winning — and they are.
Until your agent calls to tell you the appraisal came in below the agreed-upon sales price. Whomp, whomp, whomp.
The good news is that a low appraisal doesn’t have to be a deal killer. Having a knowledgeable agent at your side can make all the difference when it comes to bouncing back from a low appraisal.
Ready to fight back? Here are the top six things you can do.
1. Reduce the price of the house to the appraised value
As the seller, you can always sell the house at the appraised value without negotiating with anyone. This is the fastest way to “recover” from a low appraisal, but it could mean leaving money on the table. (And that’s always hard to swallow.)
2. Have the buyer make up the difference
In some cases, the buyer will have enough cash on hand to cover the difference between the appraisal and the selling price at closing. If the buyer feels confident that the value is there for her — despite the appraisal — she can simply add cash to the down payment, and the lender should be satisfied.
3. Meet in the middle
If both parties still want the sale to go through, it could make sense to split the difference, with the seller dropping the price a bit and the buyer adding cash to the down payment.
For example, if the difference between the sales price and the appraised value is $10,000, the seller could lower the price by $5,000 and get the buyer to bring another $5,000 to closing. This solution depends entirely on the relative willingness and financial positions of the two parties.
4. Challenge the appraisal
This option is a bit of a long shot. Only the appraiser’s client — the lender — can demand a review of the appraisal, and only the buyer can request a review or a second appraisal.
As the seller, you can support the buyer in this effort by sharing the competitive market analysis that you received from your agent or by giving her the results of an independent appraisal, if you have one. You also can offer to split the cost of a second appraisal if the lender agrees.
This route has long odds because the decision is ultimately up to the lender, and the lender doesn’t have the same investment in the transaction that the buyer and seller have. If the lender doesn’t have a compelling reason to doubt the appraisal, then that tends to be the end of the line. (In my experience, only a small percentage of these requests are granted.)
5. Put the house back on the market
If the buyer can’t or won’t put more money down, and you’re not interested in reducing the price, you can take your chances by allowing the deal to fall through and putting the house back on the market.
This can be disappointing to everyone involved. But if you’re in this situation because multiple offers brought the offer price above the asking price, then it might not be a bad way to go. You could get lucky and receive a cash offer when your agent relists the home. In that scenario, the appraisal won’t be an issue. Plus, even without the cash offer, another lender’s appraiser could have a more favorable point of view.
When considering scrapping your deal, don’t forget that at this point your house has been off the market for several weeks and you’re putting yourself that much farther from a closed sale.
This is where your agent is especially helpful. Your agent understands what the market is doing and can clarify your options so you can make the best decision for that moment. You might also have other options, as rules vary from lender to lender and from state to state.
6. Stay calm
The hardest tactic is also the most simple — above all, stay calm, look at the facts, and let your agent do the negotiating.