What Happens if a Home Doesn’t Appraise?

As you are amidst a real estate transaction, as either the buyer or seller, you might be wondering, “What happens if the home doesn’t appraise?” This is a valid concern. If a home doesn’t appraise, it puts the transaction at risk. Let’s explore why this might be and a few scenarios of how to proceed in a low appraisal situation.

When putting a property up for sale, a list price is determined. Sometimes, homes are priced too high. Whether this is due to a miscalculation or in hopes for a higher sale in a hot market, it happens. However, one of the reasons we stress pricing a home just right and using real estate data to do so, is because appraisers also use data. And if the numbers don’t match, there’s a problem.

As a seller, one of the easiest remedies is to reprice your home. Depending on the market, you may not find many potential buyers willing and able to pay the difference between the appraisal price and sales price out of pocket. By lowering the price of the home to match the appraisal price, you can alleviate the buyer’s conundrum. Sometimes, in an especially hot market, you may not find this necessary, and will wait until you find a buyer willing to bridge the gap between amounts.

What do we mean about the difference in price or the gap? A home is listed at $315,000, for example, and that is the agreed upon price. This means that the loan a buyer seeks has parameters specific to that amount. In the instance a buyer uses an FHA loan and puts 3.5% down, they will be expected to pay an $11,025 down payment and will receive a loan for $303,975. If the home appraises for only $305,000, however, the buyer may only receive a loan for $294,325 (assuming a 3.5% down payment rate). This means the buyer will need to pay the difference out of pocket ($20,675 total, $9,650 more than originally planned).

If this scenario happens, what is next? Let’s explore at a few of the options:

1. The buyer agrees to pay the additional amount needed to bridge the gap and purchase the home.
2. The buyer and seller renegotiate a new sales price that will allow the buyer to continue with the transaction.
3. The buyer is unable to bridge the gap, and the buyer and seller proceed with terminating the contract.
4. The buyer and/or seller refute the appraisal.

If the buyer agrees to pay the additional amount required to purchase the home at the original list price, the real estate transaction continues as normal.

If the buyer and seller renegotiate, a new purchase contract will be written up, and the real estate transaction can continue. Renegotiation might not be a price adjustment. Sometimes when renegotiating, buyers and sellers find creative ways to tackle the appraisal gap. They may agree to split the difference, or the seller might offer more concessions that would cover some of the costs. Real estate agents are known for their negotiation skills and can help the buyers and sellers navigate this option.

If the buyer is unable to bridge the gap between appraisal and list price, if there is an appraisal contingency written in the purchase contract, the buyer and seller may be able to terminate the contract, without the buyer losing their earnest money deposit. If this contingency is not listed in the purchase contract, a buyer will still be able to terminate the contract but may lost their earnest money deposit.

The final option is that the buyer and/or seller refute the appraisal. There is a chance that during the real estate transaction, additional similar properties have sold with higher appraised values, and these should be provided to the appraiser for review, along with any other additional updates or reasons the appraiser should consider a higher appraisal amount. The buyer can also consider doing another, different appraisal, but will need to pay out of pocket for this to be done. Keep in mind, that it is not common for an appraiser to readjust to a much higher amount, or for a new appraisal to come in at a much different price than the original.

While it’s never fun to hit this low appraisal speed bump during a real estate transaction, the reality is, that it could happen. Fortunately, as shown by research from Fannie Mae, in a balanced market, homes appraise below the contract value less than 8% of the time, and the vast majority of these instances result in a renegotiation in the borrower’s favor. Understanding why this happens, and what your options are when it happens, can prepare you to confidently take on this hurdle. The Oak & Main Real Estate Group would love to offer you our expertise when it comes to real estate and specifically regarding what to do if a home doesn’t appraise. Contact us here or send us an email to team@oakandmainnc.com and we will be in touch!