How To Navigate A Low Appraisal

The Appraisal: It's one of the main issues we come across as real estate agents, especially in a fast appreciating market.

If a buyer in a real estate transaction is getting a loan to purchase the property, which is the majority of the time, then it is likely contingent upon the bank's appraisal of the home. 

This appraisal contingency is one of the major 3 contingencies in the California purchase agreement. For more info on contract contingencies, see our previous blog HERE.

Basically, if the appraisal company hired by the bank does not feel that the purchase price for the property is in line with the current market value, the bank will not lend on the home (at least not at that price).

So what do you do in a situation where the appraisal comes in low?

Well, there are 4 simple options.

1) The Seller Comes Down to the Appraised Value

This can be a sticky situation. The seller has likely already counted their net returns for the transaction and now, because of a 3rd party source, they may be making less money.

This option will usually depend on how low the appraisal is. If it's only a few thousand dollars off, and the buyer is tapped out of funds, sometimes it's easier for the seller to just accept the new purchase price and move on with the transaction.

After all, the current buyer is likely the highest offer, so the seller would potentially be looking at lower offers anyways if they did not move forward with the transaction.

2) The Buyer Makes up the Difference

If you've been shopping for homes in the 2021 market, you'll understand that this option is currently the only one. Why?

It's such a mismatched seller's market, that buyers are waiving their appraisal contingencies and agreeing to bridge the gap (if the appraisal comes in low) in order to set themselves ahead of the other offers on the table.

Of course, if you are looking to negotiate this way, you'll likely be asked to agree in writing and also need to show proof of funds available to make good on your promise.

3) Meet in the Middle

When both buyer and seller are committed to seeing the transaction through, sometimes we see them meet in the middle.

This, of course, seems like the fairest option. The seller doesn't make as much money and the buyer pays a little more to get their dream home. 

Believe it or not, even in a lopsided seller's market, we usually see a meeting of the minds, whether it's halfway or another version of a renegotiation. Most buyers and sellers do not want to start the whole process over when the unknown can be so risky.

4) Cancel the Contract

Under the safety of the appraisal contingency, the buyer can cancel the contract if the appraisal does not come in at the purchase price. Likewise, if the buyer does not remove the appraisal contingency by the due date, the seller can cancel the contract.

It's not often that we don't see either party try to make things work, but it does happen. 

This is a major reason that both agents (if experienced) try to foresee a potential appraisal problem before it happens and negotiate it upfront before any purchase agreements have been legally executed.

If you or someone you know is looking to buy, sell, or invest in San Diego county, feel free to reach out to us! We would love to be your real estate resource.