In a previous article, we talked about the different scenarios that can occur when a home appraisal comes in lower than the purchase price. In this spinoff article, we will discuss how a home buyer might negotiate with the seller after a low appraisal.
Purpose of a Home Appraisal: Determining Value
Before we talk about negotiating strategies, let’s talk about the appraisal process itself.
A property appraisal is basically a professional estimate or opinion of a home’s current market value. “Current” is the key word in that last sentence. Home prices change constantly. Sometimes they rise. Sometimes they fall. But they rarely stay the same over the long term.
That’s why mortgage lenders typically require an appraisal before they’ll issue a loan to a borrower. They want to know how much the property is worth in the current market, to ensure they’re not lending more than the property is worth.
So let’s assume you make an offer on a home and the seller accepts your offer. Your mortgage lender sends an appraiser to evaluate the property and determine how much it is worth in the current market. But in this case, the appraisal comes in low, meaning the appraiser has determined that the house is worth less than the amount you’ve agreed to pay for it.
In this scenario, you can do one of three things:
- walk away from the deal entirely
- pay the difference out of pocket
- negotiate with seller to find common ground
If you really want the house, negotiating with the seller might be worth your time and energy. So let’s talk about how to do that.
Negotiating With the Seller After a Low Appraisal
For starters, you might want to include an appraisal contingency within your purchase offer / contract. This kind of contingency allows you to back out of the deal if the home appraises below the asking price (and the seller refuses to lower it).
If the appraisal comes in lower than the purchase price, your contingency would essentially let you out of the contract — while retaining your earnest money deposit. So you might think of it as a kind of safety feature, designed to protect your deposit in certain situations.
But you don’t necessarily have to walk away from the deal. There might be room to negotiate with the seller after a low appraisal. In fact, this is one of the more common negotiating points in residential real estate.
For example, you could submit a second offer for a lower amount, one that is closer to the appraised value of the house. In this case, you’re asking the seller to “come down” from the initial asking price, since it appears the house might be overpriced.
Using ‘Comps’ to Support Your Offer
In a best-case scenario, home buyers and their real estate agents will research recent sales prices in the area before making an offer. These are referred to as comparable sales, or “comps.” They are similar homes that have sold recently within the same area where you are planning to buy.
Negotiating with the seller is a lot easier if you have some supporting data. And that’s where those comps come into the picture.
If you resubmit your offer for a lower amount — and back it up with recent sales data and the home appraisal — you’re making a strong case to support your offer. You’re giving the seller compelling evidence that they might be pricing the home too high, given current market conditions.
Whether or not the seller agrees with the information you present is another story. But at least you’ve done your due diligence and presented your best offer.
How a Seller Might Respond During Negotiations
Let’s recap where we are in the negotiating process.
You’ve made an initial offer, and your mortgage lender then had the home appraised to determine its value. The appraisal “came in low,” meaning the appraiser determined it was worth less than the purchase price. You then made a second and lower offer, backing it up with comps and appraisal data.
At this point, one of three things will likely occur:
- The seller could simply refuse your second offer, with no counteroffer.
- The seller could accept the lower amount you’ve offered, allowing the transaction to move forward.
- The seller might agree to “meet you in the middle,” by lowering the purchase price somewhere in between the original amount and the appraised value.
Current housing market conditions will likely influence the homeowner’s decision. If it’s a hot market with lots of other buyers lining up to make offers, the seller will be more inclined to reject your lower offer. In a slower market, on the other hand, sellers are usually more willing to negotiate the sale price.
The first and second bullet-point scenarios listed above are straightforward. If the seller rejects your offer, you’ve basically come to a dead end. If they accept the revised amount, the deal can move forward.
But what about the third scenario? What do you do if the seller agrees to lower the price to some degree, but not to the point that it matches the appraisal? In this kind of scenario, you have to ask yourself how much you want the home.
If you feel that the revised asking price is pretty close to the market value of the home, it might be best to accept it. But if you’re using a mortgage loan, you’ve got another important variable to consider…
How the Appraised Value Could Affect Your Mortgage
When negotiating with a seller after a low appraisal, you also have to consider the mortgage loan factor. Unless, of course, you’re paying cash for the house.
From a mortgage lender’s perspective, the whole point of the property appraisal is to determine the current market value of the home. It’s rare for a lender to approve a loan that exceeds the appraised value. In most cases, they use the appraisal amount as the maximum for what they are willing to lend.
So, if the appraisal comes in lower than the purchase price, the buyer will have to negotiate with the seller to get them to come down. If the seller only comes part of the way down (but still sets the asking price above the appraisal), the buyer might have to add cash to the down payment to make up for the difference.
Just know that there might come a time when you have to walk away from the deal. This is a common occurrence in the real estate world, so don’t be surprised if it happens to you.
After all, it takes two parties to negotiate a sale. If one party is unwilling to negotiate, the other party has some tough choices to make. And that might mean finding another house to buy.
Brandon Cornett
Brandon Cornett is a veteran real estate market analyst, reporter, and creator of the Home Buying Institute. He has been covering the U.S. real estate market for more than 15 years. About the author