What Should You Do When The Appraisal Is Less Than The Offer?
You have several options – including walking away from the sale. This doesn’t work in every situation, however. Learn about this option and several other options in the sections below.
Pay The Difference
If the seller won’t negotiate a lower price, you’ll be on the hook to pay the difference unless you have an appraisal contingency in your contract. The appraisal contingency gives you a way out of the contract without losing your earnest money. In the absence of an appraisal contingency, you must buy the home or risk losing your earnest money.
Without a lower sales price, you’ll have to pay more for the home. Since lenders base your loan amount on the appraised value, you’ll need your agreed-upon down payment plus the difference between the sales price and appraised value to be paid upfront.
What if you don’t have the cash? Ask for gift letters from family members or leverage your investments. You may be able to use some retirement funds without paying a penalty. Talk with your 401(k) administrator or tax adviser to see your options. If you own other real estate, consider tapping into the equity and using the funds to cover the appraisal gap.
Renegotiate The Offer
If you have an appraisal contingency on your sales contract, you may be able to work with the seller. Start by requesting the seller to lower the price to the appraised value. This would eliminate the appraisal gap and your roadblock to buying the home.
If the seller is unwilling to lower the price to meet the appraised value, you could ask them to split the difference. For example, if there’s a $10,000 difference, see if the seller will lower the price by $5,000 while you contribute the other $5,000.
Asking the seller to renegotiate can be risky in a seller’s market, so it’s best to tread cautiously. If the seller has a kick-out clause, they could accept another offer that comes through. They still must give you the time to remove your appraisal contingency and seal the deal, but they can choose the other offer if you don’t.
Dispute The Appraisal
Sometimes, buyers (or sellers) don’t agree with the appraisal. In this case, you can dispute the appraisal, asking for a reconsideration of value. However, this isn’t easy to do successfully. You’ll need plenty of evidence to prove the appraisal is inaccurate.
You must prove one of the following:
- The appraiser didn’t use appropriate comparable sales, and more accurate options are available
- The appraiser missed features or upgrades in the subject property
- You found mistakes in the report
- The appraiser only conducted a drive-by or exterior appraisal
To dispute the appraisal, you must do so in writing. Carefully craft a detailed letter stating why you’re disputing the appraisal and showing your proof to back up your claim. Keep your letter short, polite and to the point. Supplement it with as much evidence or research as possible.
Walk Away from the Sale
It’s not the ideal choice, but walking away from the sale can be the best option if you’re worried about paying more than a property is worth. If you’ve unsuccessfully renegotiated with the seller and disputed the appraisal to no avail, it may be best to look for another property.
Before doing this, talk with your attorney. If you didn’t include an appraisal contingency in your contract, you might risk your earnest money. Other contingencies, such as a mortgage financing contingency, may still help, though.
