When buying a home, the appraisal is a critical part of the process. The appraisal determines if the purchase price is in line with the home’s actual market value. This protects both the buyer and the lender from overpaying. But what happens if the appraisal comes back lower than the agreed-upon price? Can a buyer walk away if the house doesn’t appraise for the purchase price?
The short answer is yes, a buyer can walk away if the house doesn’t appraise for the contracted price. However, there are some important factors to consider before making this decision.
What is an appraisal?
An appraisal is an estimate of a home’s market value based on comparable sales, condition, location, and other factors. Appraisals are typically required by mortgage lenders to ensure the home is worth the amount being lent.
Appraisals are performed by licensed, professional appraisers. The appraiser will physically inspect the home and research recent sales of similar homes in the area. The appraisal provides an independent, impartial opinion on the property’s value.
Lenders usually require the appraised value to be at or above the amount of the loan. If the appraisal “comes in low,” meaning the value is less than the agreed-upon price, this creates an appraisal gap.
What happens when there is an appraisal gap?
When the appraisal value is lower than the contracted price, this leaves an appraisal gap that must be addressed. For example:
– Purchase Price Agreed Upon: $300,000
– Appraised Value: $285,000
– Appraisal Gap: $15,000
This means the lender will only finance up to the appraised value of $285,000. The buyer and seller have a few options:
– **The seller can lower the price** – The seller can agree to lower the purchase price to match the appraisal. This eliminates the gap and allows the transaction to proceed.
– **The buyer covers the difference** – The buyer can pay the difference in cash from their own funds. The lender will finance up to $285,000 and the buyer covers the extra $15,000.
– **The parties negotiate** – The buyer and seller can try to negotiate to find a price in the middle they are both comfortable with.
– **The buyer walks away** – If no agreement can be reached, the buyer has the right to walk away and get their earnest money deposit back.
Can a buyer back out if the house doesn’t appraise?
Yes, a buyer can back out of a purchase contract without penalty if the home appraises for less than the agreed price.
The mortgage contingency clause in the purchase agreement typically provides an “out” for the buyer if the appraisal comes in low. This contingency states that the buyer’s offer is contingent on obtaining mortgage financing.
If the property does not appraise for at least the sale price, the buyer would not be able to obtain full financing. The mortgage contingency legally allows the buyer to cancel and get their earnest money deposit back.
However, most purchase contracts require the buyer to actively work to resolve the issue in good faith before having the right to walk away. Common efforts include:
– Asking the seller to reduce the price
– Appealing the appraisal
– Paying the difference in cash
If the buyer makes reasonable efforts that are rejected by the seller, only then can they exercise the mortgage contingency and cancel without losing their deposit.
Should a buyer walk away if the appraisal is low?
Just because a buyer can walk away from an appraisal gap doesn’t always mean they should. There are pros and cons to consider when deciding what to do:
**Pros of walking away:**
– Avoid overpaying for the property based on lender’s valuation
– Buyer keeps earnest money deposit
– Opportunity to negotiate improvements or repairs
– Buyer retains leverage and control in deal
**Cons of walking away:**
– Transaction falls through after time and effort spent
– Buyer loses opportunity and has to restart home search
– Appraisal may have been inaccurate or appealable
– Strong desire to buy the home despite gap
Here are some key questions for a buyer to ask when deciding whether to walk away:
– Is the appraisal gap significant enough to warrant cancelling? A small gap may not be worth derailing the entire purchase.
– Do you have any wiggle room in your budget to cover the gap? Paying out-of-pocket may be preferable to losing the home.
– How does the purchase price compare to your own valuation? Do you still feel you’d be getting a good deal?
– Are there ways to appeal the appraisal or ask for a second opinion? The first valuation may have missed important data.
– How difficult will it be to find a similar home you like as much? Is it worth restarting the search process?
If the appraisal gap is minor, the buyer can stomach the extra costs, and alternative homes are scarce, it may make sense to proceed anyway if the seller won’t budge. But if the gap is significant and paying more seems unwise, walking away may be the smartest move.
What are the risks of walking away?
While a buyer has the right to back out after a low appraisal, there are some potential downsides:
– **Losing the home** – The buyer loses the opportunity to purchase this specific property. There is no guarantee another similar home will become available.
– **Loss of time and effort** – The buyer already invested significant time touring homes, making offers, negotiating terms, and completing inspections or other due diligence. Walking away means starting back at square one.
– **Emotional attachment** – Some buyers become emotionally invested in a home. Even with an appraisal gap, they may strongly desire to follow through on purchasing it.
– **Appraisal challenges** – The buyer risks that the initial appraisal was flawed and could have been appealed or contested. If they simply walk away, they’ll never know if a higher valuation was achievable.
– **Change of heart** – A buyer may have a knee-jerk reaction to walk away from an appraisal gap, only to regret it if sellers are unwilling to negotiate. The opportunity to purchase the home is permanently lost.
– **Market uncertainty** – Choosing not to buy risks that home prices and competition will be even higher in the future when restarting the search. The buyer may look back and wished they found a way to make the original deal work.
While an appraisal gap justifies a buyer backing out, the buyer must carefully weigh these risks before making a final decision. Don’t let a low appraisal make you immediately walk away without doing due diligence.
Tips for buyers dealing with a low appraisal
If you find yourself in a situation with an appraisal gap, here are some tips:
– **Review the appraisal report** – Read through the appraisal yourself and look for any errors, outdated comps, or missing improvements. These could support an appeal.
– **Ask your agent to analyze the appraisal** – Have your real estate agent look over the appraisal for accuracy and provide guidance on appealing. They may spot issues you missed.
– **Talk to your lender** – Discuss the possibility of asking for a second appraisal or appealing the initial one. They can advise you on the process and any costs involved.
– **Request an appraisal review** – Pay a qualified local appraiser for a second opinion on the property’s valuation. Their higher appraisal may convince your lender to use that amount.
– **Offer to cover the gap** – If you can afford to pay the difference in cash, communicate this willingness to the seller upfront. It shows you are committed to getting the deal done.
– **Negotiate seller contributions** – Ask the seller to pay for closing costs or make repairs to help offset the lower sale price needed to cover the gap.
– **Compromise on price** – Negotiate to split the difference on the gap and find a sales price in the middle you can both live with.
– **Exercise patience** – Making demands or threats will only make negotiations more difficult. Keep communication open and give the situation time to be resolved.
With patience and persistence, many low appraisals can be overcome without having to walk away and give up on the home completely. But bear in mind, sometimes walking away is the smartest decision.
How to back out of a purchase agreement after low appraisal
If you do elect to exercise your right to walk away due to an appraisal gap, here are the typical steps:
**1. Notify the seller in writing**
– Formally communicate your intent to cancel the purchase agreement. State this is due to the home appraising for less than the purchase price.
**2. Reference mortgage contingency**
– Specifically cite the mortgage financing contingency as justification for cancelling without penalty. This was part of your original purchase offer.
**3. Send copy to real estate agents**
– Provide copies of your cancellation notice to both your agent and the seller’s listing agent. This keeps all parties in the loop.
**4. Request return of earnest money**
– Ask for your earnest money deposit to be promptly returned according to terms of the purchase contract. The seller must comply or provide reasons for retaining it.
**5. Allow time for response**
– Give the seller a reasonable window to respond, such as 7-10 days. They may agree, make a counteroffer, or refuse to release deposit.
**6. Consult real estate attorney if needed**
– If the seller refuses to cancel the contract or contests the earnest money return, you may need to get legal guidance on next steps.
**7. Walk away if seller confirms cancellation**
– If the seller acknowledges your right to cancel and agrees to refund the deposit, the deal is off and you can walk away.
Follow the proper processes outlined in your purchase agreement to ensure you can smoothly back out after an appraisal gap without escalating into a legal dispute.
Can you appeal a low home appraisal?
Yes, a buyer can appeal an appraisal that comes in lower than the contracted price. While appraisals are generally trusted to be accurate, they are still ultimately opinions that can sometimes be challenged.
Here are ways a buyer can appeal or contest a low appraisal:
– **Provide additional sales comps** – The buyer can present documented evidence of recent comparable home sales the appraiser overlooked indicating a higher valuation.
– **Point out condition errors** – Errors regarding property condition noted in the report or missing home improvements can result in a low appraisal.
– **Highlight flaws in analysis** – Questionable adjustments or failure to account for unique property attributes may justify asking for corrections.
– **Order a second appraisal** – At their own expense, the buyer can hire a second appraiser for a new opinion on value. This might convince the lender the first appraisal was off.
– **Request appraisal review** – The buyer’s lender can formally ask for a review of the initial appraisal, which may result in an increased value.
– **File a complaint** – If there is justification to believe an appraiser violated standards, the buyer can file a complaint with the state licensing board.
– **Provide supporting broker opinions** – Local real estate brokers can prepare Broker Price Opinions arguing for a higher valuation based on in-depth market knowledge.
A low appraisal doesn’t have to be the final word. With evidence and persistence, a buyer may be able to successfully appeal and get the home’s value adjusted higher.
Should a seller lower their price after a low appraisal?
When an appraisal comes in lower than the agreed price, the ball is then in the seller’s court to decide if they are willing to lower their price to match the appraised value. There are a few factors sellers should consider:
**Appraisal accuracy** – The seller should review the appraisal report for any obvious flaws or errors. If the valuation seems unjustified, they may have grounds to challenge it before agreeing to lower the price.
**Listing agent’s input** – Wise sellers will consult their agent, who may see holes in the appraisal methodology or comparables. The agent can advise if they feel the property is worth fighting for.
**Buyer incentives** – Offering buyer incentives like closing cost contributions instead of lowering the sale price may help cover an appraisal gap without officially dropping the price.
**Desire for the deal** – How badly does the seller want this particular buyer? If they want the deal enough, lowering their price to make it work may be worthwhile to them.
**Alternative offers** – If the property is attractive, the seller may be confident they can find another buyer at their original asking price. But if options are limited, keeping this buyer may require dropping the price.
**Market activity** – If the market is appreciating quickly, the seller risks the next appraisal also being low unless they lower their price now in line with data.
Rather than reflexively lowering their price, wise sellers will carefully weigh these factors and the individual deal circumstances before making their decision.
What happens if the seller refuses to lower the price?
If the seller declines to drop their asking price in light of the appraisal, the buyer then has three options:
**1. Renegotiate terms**
The buyer can attempt to negotiate alternative terms, like having the seller cover closing costs or pay for repairs that offset the appraisal gap.
**2. Cover the gap themselves**
The buyer can pay the difference between the purchase price and appraised value out of their own funds if they have financial capacity and desire the home badly enough.
**3. Walk away**
With a seller unwilling to adjust on price, the buyer can exercise their right to walk away and have the earnest money deposit returned as stipulated in the purchase agreement.
If the seller won’t compromise and the buyer can’t stomach the appraisal gap, walking away is generally the only viable recourse. But the buyer risks losing the deal on a home they love. Open communication and good faith efforts to find common ground are key before making a final decision.
Conclusion
Dealing with a low home appraisal can put buyers and sellers in a difficult position. But buyers do have the right to walk away from a purchase contract without penalty if the home doesn’t appraise for the agreed price.
Before walking away after a low appraisal, buyers should carefully consider their options and the risks involved. Appealing the appraisal, negotiating a lower price with the seller, or contributing more cash may be preferable to cancelling the deal. But sometimes walking away is truly the smartest move for a buyer.
Likewise, sellers must weigh several factors when deciding if they should lower their price in response to a low appraisal. With good communication and flexibility on both sides, many deals can still be saved even after an appraisal gap. But in some cases, the gap is simply too wide to bridge. Home buyers should be aware of their rights and understand the pros and cons on walking away from a sale after an unacceptable appraisal.