What happens if the buyer’s appraisal comes back low?
Before I answer this question regarding a low appraisal let’s establish a few things about appraisals.
A home appraisal is an unbiased estimate on the market value on the home – conducted by a licensed appraiser. The appraisal is normally ordered by the buyer’s lender to ensure that the agreed upon price of the home is appropriate for the market value. Basically the lender is trying to protect itself and the buyer from loaning too much for a home that isn’t worth that amount. In the Nashville market, most buyers do make home purchases contingent on an appraisal – especially if they are using bank financing.
So now to the question… In the situation when the appraiser sends back the report with a lower value (and the contract is contingent upon it appraising) the following things can occur. Let’s use the example of a home under contract for $325k only appraising for $315k.
- Both side negotiate: Seller adjusts down and buyer comes up with more. They meet in the middle. An example would be the seller lowers the price to $320k and the buyer brings an additional $5,000 to closing.
- The seller can lower the price to the appraised value. In our market this is the most common scenario – for some financing situations such as FHA loans the appraisal sticks with the property for up to 6 months. In this case the seller would adjust the property price to $315,000.
- The buyer makes up the difference between the original purchase price and the lower appraised value. In this case the purchase price would remain $325,000 but the bank would only loan up to the amount of $315k – so the buyer would be bringing an additional $10,000 cash to the closing table. Obviously you can see that this may not be possible for most buyers. Also, most buyers are not willing to pay that amount after learning it is not worth that amount.
- The transaction is terminated (either initially or after trying to negotiate). First if the contract is contingent on a full value appraisal – the buyer has the right to straight up walk away from the deal once they learn of a low appraisal. Another reason we see it cancelled is if neither party will budge thus the contract will be terminated
- You can try to challenge the appraised value. We always challenge appraisals for our sellers and it does work sometimes… but the likelihood is slim. Although there is a chance if you can find a new comparable sold property or a flaw in the appraisal. But there is a difference between a low appraisal and a bad appraisal (aka an appraisal with mistakes).
