Appraisal Gap: What Happens When an Appraisal Comes in Low?

Aalto Insights Team
Feb 6, 2023

A real estate transaction is daunting by design. It has dozens of moving parts, many of which can stall the process. Getting a home appraisal is a critical part of the homebuying process, and an appraisal gap can bring it to a screeching halt. 

An appraisal gap is the difference between the buyer and the seller’s agreed-upon purchase price and the value determined by a professional appraiser. When your mortgage lender’s appraiser claims the house is worth less than what you agreed to pay, you have to figure out how to keep the deal alive or walk away from it. Luckily, you have some options. 

In this post, we’ll review what a home appraisal is, detail the causes of appraisal gaps, and explain how you can resolve them. We’ll also discuss if and when you should consider including an appraisal contingency or an appraisal gap coverage clause in your purchase agreement.

What Is a Home Appraisal?

An appraisal is an educated estimate of a home’s value based on the current housing market, school districts, location of the home, and other factors.

Appraisals are required by lenders when entering into a real estate contract that will involve a mortgage. They help homeowners narrow in on an asking price and keep mortgage lenders from lending borrowers more than the appraised value of a home.

During the home appraisal process, a licensed or certified appraiser conducts an on-site or remote walk-through of the house. Then they research the home prices of comparable sales (or “comps”) and current market conditions, and review the notes they took during their site visit. After compiling all this information, they submit an appraisal report to your lender.

If the appraisal amount is in line with the agreed-upon value of the home, you can move on to the next steps of purchasing a home. However, if there’s an appraisal gap, you need to figure out why and what you can do about it.

What Causes an Appraisal Gap?

Appraisal gap: real estate agent taking pictures of a house

Low appraisals are usually the result of one or more of the following:

Market conditions: Competitive markets and bidding wars can increase a home’s purchase price. For instance, during the early days of the pandemic, it was common for properties to sell for $50,000 — even $100,000 or more — above their listing price. In these situations, either the loan amount needed to increase or buyers had to come up with extra cash for the down payment.

Comparable sales: For whatever reason, the comparable properties reviewed during the appraisal sold for less than the agreed-upon contract price of your home. This is usually tied to market conditions or location.

Condition of the house: If the appraiser finds that the home is in poor condition, the appraisal may determine that it’s worth less than the fair market value of comparable properties. When this is the case, you should consult a home inspector to learn more about what repairs are going to be needed.

Differing opinions: Sometimes, when the seller is going the for-sale-by-owner route or if they have an overzealous real estate agent, they may try to sell their home for more than it’s worth. An appraisal will provide you with a more accurate valuation.

What Are Your Options When There’s an Appraisal Gap?

An appraisal gap doesn’t mean your dreams of buying a home are doomed. You almost always have options in the world of real estate, and receiving a low appraisal is no exception. Here are your four choices when faced with an appraisal gap:

1. Offer to Pay the Difference

If the home purchase contract is for $800,000, but the appraisal comes in at $750,000, you could offer to pay the $50,000 difference. This isn’t an ideal option for buyers. After all, not everyone has an extra $50,000 lying around, especially when you’ve already scrounged up a hefty sum for the down payment and closing costs.

Unfortunately, if you don’t have an appraisal contingency in your contract and the seller isn’t open to renegotiating, you’ll either:

  1. Pay the difference.
  2. Lose your earnest money deposit.

Hopefully, you won’t have to make that decision.

2. Renegotiate With the Seller

If your contract does include an appraisal contingency, the seller is more inclined to negotiate with you — especially if they are motivated to sell their house.

Your first ask should be if the seller is willing to lower the purchase price to the home's appraised value. If the seller agrees to reduce the cost from $800,000 to $750,000, the appraisal gap will no longer exist, and the transaction can continue to move forward.

Only some sellers will be open to this suggestion, so your second ask should be to meet somewhere in the middle. Instead of purchasing the house for $800,000, what if you bought it for $775,000, cutting the appraisal gap in half? If they agree, you’ll need to pay that extra $25,000, but you’ve also saved $25,000.

You can also negotiate seller concessions to help offset the originally agreed-upon price of the home. If the seller is willing to pay more in closing costs, you’ll have extra cash to close the appraisal gap.

3. Request a Second Appraisal

Appraisers aren’t always perfect. If either the buyer or the seller disagrees with the appraisal report, you can dispute it or request a new appraisal.

If you go this route, you first need to prove that the original appraisal is inaccurate. Here are some ways you can do that :

  • Find mistakes in the report.
  • Prove that the appraiser didn’t do an internal appraisal, meaning that the appraisal was either done remotely or as a “drive-by.”
  • Point out more accurate comparable sales indicating that the appraised home may be worth more.
  • Identify house upgrades or features the appraiser missed.

Craft a concise and polite letter to your lender stating why you’re disputing the appraisal, and include all the evidence that supports your argument.

4. Walk Away

You can always walk away from the sale if the above options don’t work out. As long as you have an appraisal contingency, you’ll get your earnest money back and can look for a new house.

While not an ideal situation, the threat of a potential buyer walking away sometimes motivates sellers to renegotiate. This is less likely to happen if you’re in a seller’s market.

Appraisal Contingencies and Appraisal Gap Coverage Clauses

Appraisal gap: real estate agent showing a house to a buyer

While they sound similar, appraisal contingencies and appraisal gap coverage clauses are not the same thing, and you should know their distinctions:

Appraisal contingencies provide you with a legal way to exit a purchase contract if the home's appraised value is different from your agreed-upon sales price. This contingency gives the buyer negotiating power if there’s an appraisal gap because if they walk away, they keep their earnest money.

Appraisal gap coverage clauses bind the buyer to the home even if the appraisal is lower than your agreed-upon purchase price. This coverage gives the seller negotiating power because the buyer can lose their earnest money if they walk away from the deal.

Typically, there’s a fixed amount of gap coverage included in these clauses. For example, if the home purchase contract is for $800,000, and the appraisal comes in at $750,000 with $10,000 of gap coverage, the buyer must pay at least $760,000 before negotiating over the other $40,000.

Minding the Appraisal Gap With Aalto

Understanding what appraisal gaps are, when and why they happen, and what you can do about them can be a lot of information to take in. It’s meant to be — because the traditional real estate process is daunting by design.

At Aalto, we help you make informed decisions about buying or selling your home.

We’re a direct real estate platform dedicated to shifting the balance of power in residential real estate away from industry insiders and toward consumers. We handle all legal documents and negotiations and are here to make buying or selling your home a smoother, less stressful experience.

Are you ready to take control of your real estate transaction? Get started today!

Aalto is a real estate broker licensed by the State of California, License #02062727 and abides by Equal Housing Opportunity laws. This article has been prepared solely for information purposes only. The information herein is based on information generally available to the public and/or from sources believed to be reliable. No representation or warranty can be given with respect to the accuracy of the information. Aalto disclaims any and all liability relating to this article.

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