The Appraisal is Below Contract Price, Now What? (2024)

So what happens if the appraisal is below contract price? The early '22 market is already showing it'll be as tight or tighter than the '20 & '21 markets, buyers are tossing off all constraints to "win" the beauty contest of buying a home. Appraisals below contract price will continue to be a challenge in 2022. Consider, appraisals this year will be using data from the already insane market of 2021 and many will still fall below contract. Remember, the buyer’s loan is based upon the lower of the contract price or appraisal. The appraisal contingency protects the lender – and indirectly the buyer – to ensure the home can be sold for at least the loan value. Buyers that waive or modify the appraisal contingency need to have cash on hand to make up any shortfall, the lender won't budge.

So what are the possible options if the appraisal is below contract price? Assuming the buyer left the appraisal contingency in place, there are a few. If that's been modified or removed, then everything is open for discussion. A short video overview from both the appraiser and the buyer/seller sides...

A Standard Contract

With an intact appraisal contingency, the three possible options if the appraised value is below contract price are:

• The seller agrees to reduce the price to the appraised value.
• The buyer covers the gap (adding the the down payment) between appraised value and contract price.
• The shortfall is negotiated and each side covers a portion (buyer adds to the down payment and seller reduces price).

With a properly written finance contingency and intact appraisal contingency, the buyer may be able to terminate the contract if the appraisal is below contract price. Nothing in the standard contract requires a seller to negotiate or agree to a price reduction; they can hold their position. If agreement can’t be reached, the contract is terminated, the buyer receives the earnest money back and home comes back on the market (again, assuming a typical offer, terms and time frames).

As a point of clarity, appraisals don’t “come in low”; they come in below contract price. Appraisers do not rubber stamp contracts, they follow MANDATED guidelines. Agents would be well advised to understand these guidelines, the selection of comparable sales at a bare minimum. They would also do well to ensure that their clients, buyers and sellers, understand this process. Most important, buyers and sellers should QUALIFY THEIR AGENT.

A Modified Contract

Right now, almost nothing is typical and many buyers tweak the contracts to look more appealing to sellers. Modifications typically include:

• Waiving the appraisal contingency entirely
• Having the mortgage company seek to have the appraisal waived
• Agreeing to cover up to $XX of an appraisal gap
• Agreeing to cover up to $XX of an appraisal gap provided the seller does the same
• Waiving the appraisal contingency but rushing to complete it during due diligence (if there is one)

There are other maneuvers as well, but the bottom line is that if buyers modify the contingency, they are acknowledging that additional money will likely be brought to the table. Every situation is unique, contract changes and any workarounds will be specific to the deal. Understand however, that absolute disasters can arise if any of these workarounds are not properly structured and controlled. As for sellers, any type of “waiving the appraisal” move should be met with very tight restrictions. We do a number of things for our sellers to ensure they will not lose; we’re all about letting that buyer dance – provided they pay the band first...and we make that nonrefundable.

The Agent Situation

Not to belabor the point, but both buyers and sellers must challenge their agents, are they qualified? There are more agents right now than in at any time in history - while there are few homes for sale and closing than in any time in history. See the problem? For buyers, was an appraisal level analysis completed before deciding on a price? Were legitimate comps shared and discussed? Were other contract incentives or options considered? Was it necessary to modify the contingency? Did the agent work closely with the lender…and so much more. For sellers, were all offers thoroughly reviewed? Was the highest AND/OR best offer taken? Were the financial credentials and cash on hand of the buyer verified? Was the offer structured to ensure the buyer is firmly entrenched in the deal? Did the agent meet the appraiser on site with supporting data?

An appraisal below contract price can be dealt with provided both sides are motivated and reasonable. The contract, if not modified, provides options that usually result in deals getting done. All bets are off however, when the contingency is modified. With proper consideration and clear language, deals can get done. Caution is however, the word of the day as in the real word things routinely get sideways and expensive.

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