The appraisal is a critical step in the home-buying process. When an appraisal comes in below the agreed-upon sales price, it can initially feel like a setback. However, for a buyer with a financing contingency in place, this situation often creates a valuable opportunity to renegotiate the purchase price.
As your mortgage broker, understanding this process allows you to remain financially protected and strategically positioned.
Here is a concise breakdown of why a low appraisal can benefit the buyer:
- Lender Protection: A mortgage lender bases the loan amount on the lesser of the sale price or the appraised value. If the appraisal is low, the loan amount is automatically capped at that lower value, and your financing contingency is triggered.
- Objective Evidence: The appraisal is a professional, third-party report using recent comparable sales (comps). It provides objective evidence to the seller that the property may not be worth the price they accepted.
- The Buyer’s Options: The low appraisal gives you specific leverage, often resulting in one of the following outcomes:
- Price Reduction: You can ask the seller to reduce the sales price to the appraised value. Since the low appraisal will likely affect any future buyer using financing, the seller often finds this the most practical solution.
- Shared Gap: You may negotiate to have the seller drop the price partially, with you covering the remaining difference (the “appraisal gap”) in cash. This still results in a lower cost to you than the original contract price.
- Contract Cancellation: If no agreement can be reached and you are unwilling to pay the difference in cash, the financing contingency allows you to cancel the contract and recover your earnest money deposit. This “walk-away” option is your strongest negotiating tool.
- The Seller’s Dilemma: The seller knows that putting the house back on the market will likely lead to the exact same appraisal issue with the next buyer. This creates a strong incentive for them to work with you to close the deal quickly.
As always if you have any questions please contact us!
