Understanding Appraisals: What to Do If Your Home Appraises Low

Home appraisals are used to establish market value of a property. In the world of residential real estate, they are most frequently used to protect a mortgage lender’s interest. Translation; if the home doesn’t appraise for the agreed upon selling price, the buyer will have to renegotiate terms with the seller and/or lender or walk away (if the contract includes this clause).  An appraisal isn’t actually required in ALL residential real estate transactions. If the buyer is purchasing the home with their own cash and the seller and buyer agree upon the sale price of the property, neither party is required to obtain an appraisal.

For the sake of this article, we will assume the buyer will be purchasing the home through lender financing. This is the most common scenario in residential real estate.

Let’s say your home is appraised at a lower value than the agreed upon purchase price.  It’s less than ideal, but it does occasionally happen. This can change everything from your contract to the amount of your down payment. If you find yourself in this position, here are some options you may want to consider.

Review The Appraisal Contingency Clause

Most Montana contracts include an appraisal contingency. If an appraisal contingency clause (sometimes called an appraisal provision) is built into the terms of your contract, this means that the terms of your contract can be re-evaluated and re-negotiated if an appraisal happens to come up short. While this is meant primarily to protect the home buyer against a lower appraisal, it doesn't mean that the terms of a new deal can't be met for the good of both parties.

Get A Second Appraisal

It's entirely possible that the initial appraisal is accurate, but it doesn't necessarily hurt to get a second opinion in the event that the first appraisal seems too low. If there are obvious reasons why the appraisal doesn’t add up, you may consider a value appeal. In a value appeal you address your concerns over possible inaccuracies and the appraiser will review the appeal and respond. You may get a second appraisal. You may simply get an explanation of why he or she valued the home lower than you were anticipating.  You may also be able to simply order a second appraisal. But be prepared to pay for it out of your own pocket if you go this route. Having said all that, depending on the circumstances, a second appraisal can actually backfire. For example, what if the second appraisal comes in even lower than the initial appraisal?

Consider A Lower Price

It's a punch in the gut when your home is appraised for less than the purchase price, but this doesn't have to be a deal breaker when it comes to selling it. While you may be able to get away with a higher price for your home in a hot real estate market, if things have cooled off, this can be an important time to re-negotiate the deal you've got. If a potential buyer likes your home and has already made an offer, they may be happy to decide on new contract terms.

It can be quite disappointing if your home is appraised at a value less than the offer you've received, but this doesn't necessarily mean that you'll have to put your home back on the market. Whether you and the potential buyer decide to re-negotiate or get a second opinion, there are options which can be beneficial for both parties.