What Should You Do If Your Home Doesn't Appraise at the Sale Price?

Selling a home can feel like you're almost at the finish line when you receive an offer, complete inspections, and move toward closing. But then the appraisal comes back lower than the agreed-upon sale price.

For sellers, this can be an unexpected and stressful situation. You may wonder whether the sale will fall apart, whether you need to reduce your price, or whether the buyer can make up the difference.

The good news is that a low appraisal doesn't automatically mean the transaction is over. There are several potential ways to address an appraisal gap, depending on the purchase agreement, financing, market conditions, and willingness of both parties to negotiate.

Whether you're selling in Glendora, Covina, West Covina, San Dimas, La Verne, Azusa, or a surrounding community, understanding your options ahead of time can help you respond thoughtfully if an appraisal comes in below the sale price.

What Is a Home Appraisal?

A home appraisal is an independent opinion of a property's market value. When a buyer is obtaining a mortgage, the lender typically orders an appraisal to help determine whether the property provides sufficient collateral for the loan.

An appraiser may consider factors such as:

• Recent comparable sales
• Property size
• Condition
• Location
• Features and upgrades
• Lot characteristics
• Current market conditions

The appraised value isn't necessarily the same as the listing price or the price a buyer and seller agreed upon.

What Happens When the Appraisal Is Lower Than the Sale Price?

An appraisal gap occurs when the appraised value is below the agreed-upon purchase price.

For example, imagine a buyer agrees to purchase your home for $800,000, but the appraisal comes in at $775,000.

That creates a $25,000 appraisal gap.

Because the lender's financing is generally tied to the property's appraised value, the buyer may not be able to borrow as much as originally expected. That doesn't necessarily end the transaction, but it does mean the parties may need to determine how to address the difference.

1. Review the Appraisal

The first step is to understand what the appraisal says and why the value came in lower.

Your real estate professional can review the report with you and look at factors such as:

• Comparable sales used
• Property characteristics
• Square footage
• Upgrades
• Condition
• Recent market activity

If there are concerns about the report, the buyer and lender may have processes available to request a reconsideration of value. The appropriate process depends on the lender and circumstances.

2. Consider Whether the Buyer Can Cover the Difference

One potential solution is for the buyer to contribute additional cash toward the purchase.

For example, if the agreed price is $800,000 and the appraisal is $775,000, the buyer may choose to bring additional funds to help cover some or all of the difference.

Whether the buyer is willing or able to do this depends on their financial situation and the terms of their purchase agreement.

3. Negotiate the Sale Price

Another option is to negotiate a lower purchase price.

A seller may agree to reduce the price to bring the transaction closer to the appraised value.

This can reduce the seller's proceeds, but it may also allow the transaction to continue without starting the entire selling process over again.

The right decision depends on your goals, the market, and the specific circumstances of the transaction.

4. Split the Difference

In some situations, the buyer and seller may agree to share some of the appraisal gap.

For example, if there's a $20,000 difference, both parties could potentially negotiate a solution in which each contributes toward resolving the gap.

There is no universal formula for how an appraisal gap must be handled. It's a matter of negotiation and the applicable contract terms.

5. Consider the Cost of Starting Over

If the transaction doesn't move forward, you may need to put the home back on the market.

Before deciding to walk away from the current transaction, consider the potential costs and uncertainty of starting over.

You may face:

• Additional mortgage payments
• Property taxes
• Insurance
• Utilities
• Maintenance
• Additional marketing
• More time on the market

You also don't know what the next buyer's offer will look like or whether another appraisal will come in higher.

Sometimes negotiating a reasonable solution with the current buyer may be preferable to starting over.

6. Review the Purchase Agreement

The purchase agreement is especially important when an appraisal comes in low.

The rights and obligations of the buyer and seller depend on the specific terms of the contract, including any appraisal or financing contingencies.

Before making a decision, sellers should review the applicable terms with their real estate professional and, when appropriate, legal or other qualified professionals.

How Can Sellers Help Avoid Appraisal Problems?

While sellers cannot control the final appraisal value, preparation can help.

Before the appraisal, make sure your real estate professional has accurate information about the property, including relevant improvements and features.

Documentation may include:

• Recent upgrades
• Permitted improvements
• Major renovations
• New systems
• Comparable sales
• Relevant property information

The goal is to make sure the appraiser has accurate information about the property and its features.

Understand Your Local Market

Real estate values are influenced by current market conditions and comparable sales.

Whether you're selling in Glendora, Covina, West Covina, San Dimas, La Verne, Azusa, or a surrounding community, understanding recent sales and current market activity can help you establish realistic expectations before accepting an offer.

A strong pricing strategy from the beginning can also help reduce the likelihood of a significant difference between the contract price and market value.

Final Thoughts

A low appraisal can be frustrating, but it doesn't automatically mean your home sale is going to fall apart.

Depending on the circumstances, possible solutions can include the buyer contributing additional funds, renegotiating the purchase price, sharing the appraisal gap, or exploring other options permitted by the contract.

The most important thing is to avoid making a rushed decision.

Review the appraisal, understand the contract, evaluate the current market, and discuss your options with your real estate professional.

Whether you're selling in Glendora, Covina, West Covina, San Dimas, La Verne, Azusa, or a surrounding community, having a clear strategy can help you navigate an appraisal issue and keep your transaction moving toward closing.