What Happens When a Home Appraisal Comes in Low?
You’ve negotiated the offer, the Agreement of Purchase and Sale has been accepted, and everyone is preparing for closing.
Then the lender orders an appraisal — and the property is valued for less than the agreed purchase price.
A low appraisal can create a serious issue, particularly when the buyer is relying on mortgage financing to complete the purchase. But it does not automatically mean the transaction is over.
Here’s what buyers and sellers in Hamilton, Burlington and the surrounding area should understand.
What Is a Home Appraisal?
A home appraisal is an independent estimate of a property’s market value, generally completed as part of a lender’s mortgage approval process.
The lender wants to determine whether the property provides adequate security for the amount being financed.
An appraiser may consider factors including:
- recent comparable sales
- location and neighbourhood
- property size
- condition and improvements
- lot characteristics
- overall market conditions
The resulting appraised value doesn’t necessarily have to match the purchase price.
Why Can an Appraisal Come in Below the Purchase Price?
Real estate prices are negotiated between buyers and sellers, while an appraisal is an independent opinion of value prepared for the lender.
Those numbers can differ.
For example, a buyer may agree to pay $800,000 for a property, but the lender’s appraisal could value it at $775,000.
That $25,000 difference can affect the buyer’s financing.
This can become particularly important when prices are changing quickly or there are relatively few comparable recent sales.
What Does a Low Appraisal Mean for the Buyer?
The important point is that the lender generally bases its lending decision on the value it accepts for the property, not simply the price the buyer agreed to pay.
Suppose a buyer agrees to purchase a home for $800,000 and expects to make a $160,000 down payment.
That leaves a planned mortgage of $640,000.
If the lender accepts an appraisal of only $750,000, the financing calculation may change. Depending on the mortgage structure, the buyer may need additional cash, a different financing arrangement or another solution to complete the transaction.
The exact effect depends on the buyer’s mortgage terms and circumstances, so the buyer should immediately speak with their lender or mortgage professional.
Does a Financing Condition Protect the Buyer?
Potentially — and this is one reason financing conditions can be extremely important.
If the offer contains a valid financing condition that has not yet been waived or fulfilled, the buyer may have options under that condition.
However, the exact rights of the parties depend on the wording of the agreement and the circumstances.
A buyer should never assume that a low appraisal automatically provides a right to terminate an agreement.
If there is any uncertainty about contractual obligations, legal advice should be obtained.
What If the Offer Is Already Firm?
This can be considerably more serious.
If the buyer has entered into a firm agreement without a financing condition, or has already waived or fulfilled that condition, a financing shortfall does not necessarily eliminate the buyer’s contractual obligation to close.
The buyer may need to explore alternatives with their mortgage professional, including providing additional funds or arranging different financing.
Failure to complete a firm transaction can have significant legal and financial consequences.
Can the Purchase Price Be Renegotiated?
The parties can potentially agree to change the purchase price, but the seller generally isn’t required to reduce it simply because an appraisal came in low.
A buyer may approach the seller and attempt to renegotiate.
The seller then has to consider the circumstances.
Would keeping the existing buyer be preferable to potentially putting the property back on the market? Are there other interested buyers? Does the seller have another purchase or closing dependent on this transaction?
Sometimes an adjustment makes sense to both parties. Sometimes it doesn’t.
Can the Appraisal Be Challenged?
There may be situations where a buyer or mortgage professional believes relevant information was overlooked.
For example, there may be a recent comparable sale that better reflects the property or an important feature that wasn’t adequately considered.
The buyer can discuss the appraisal with their lender or mortgage professional and determine whether there is an appropriate process for requesting a reconsideration.
That doesn’t guarantee the value will change.
What Sellers Should Know About Appraisals
Receiving a strong offer is important, but the highest purchase price isn’t always automatically the strongest transaction.
When reviewing offers, sellers should also consider:
- the buyer’s financing condition
- deposit amount
- closing date
- other conditions
- overall strength of the terms
A very high offer that ultimately cannot be financed may create more risk than a slightly lower offer with stronger overall terms.
Every situation needs to be assessed individually.
What Buyers Should Do Before Making an Offer
Mortgage pre-approval is an important starting point, but buyers should understand that a pre-approval isn’t necessarily final approval of a particular property.
The lender may still need to approve the property itself.
Before making an offer, buyers should understand their financing limits, available cash and the potential consequences of making an offer without a financing condition.
That becomes especially important when competing for a property.
The Bottom Line
A low appraisal doesn’t automatically kill a real estate transaction, but it can create a financing gap that needs to be dealt with quickly.
Depending on the circumstances, possible outcomes may include additional buyer funds, different financing, reconsideration of the appraisal, renegotiation between buyer and seller, or reliance on an applicable condition in the agreement.
The best solution depends on the financing, the contract and the individual transaction.
If you’re buying or selling a home in Hamilton, Burlington or the surrounding area and want straightforward guidance throughout the process, visit:
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