How to Negotiate With a Home Seller in a Low Appraisal Scenario

When a home appraiser decides that a property is worth less than the amount the buyer has agreed to pay for it, some tough choices will have to be made.

The home buyer can either walk away from the deal, ask the seller to lower the price, or increase their down payment to cover the difference between the appraised value and the purchase price.

This guide explains how a home buyer can negotiate with the seller after a low appraisal, to keep the deal moving forward.

In a Hurry? Here Are the Highlights

Here are the seven most important points covered in this guide:

• A “low appraisal” situation occurs when a home is valued below the agreed-upon purchase price, forcing the buyer to make a choice.
• The home buyer can walk away from the deal, increase their down payment, or attempt to negotiate with the seller to reduce the price.
• Buyers can use comparable sales data (comps) and the appraised value to justify the price reduction.
• The seller might respond by rejecting the offer, accepting the lower amount, or compromising with a middle-ground price.
• Buyers should understand that mortgage lenders typically do not lend more than the appraised value.
• If the seller doesn’t lower the price sufficiently, the buyer may need to increase their down payment or walk away from the deal.
• An appraisal contingency in the contract can protect the buyer’s earnest money deposit if the appraisal is low and negotiations fail.

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, perhaps by using a contingency
• Pay the difference out of pocket, by bringing more cash to closing
• Negotiate with seller to find common ground and reduce the price

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

Here are some things to keep in mind when negotiating with a seller in a low appraisal situation.

• Appraisal Contingency: Did you include a contingency within your contract, allowing you to walk away from the deal if seller negotiations fail? If you did, great. If not, you risk losing your earnest money deposit. (See next section.)
• Market Conditions: In a hot real estate market, sellers tend to be less willing to negotiate over a low appraisal. They know another offer will come along. But in a slower market, they’re more likely to lower the price. What’s your market like?
• Comparable Sales: You can use recent, nearby sales of similar homes to support your request for a lower price and make a stronger case. Real estate agents refer to these as “comps.”
• Seller’s Motivation: Try to gauge the seller’s urgency to sell. A motivated homeowner may be more open to price adjustments to avoid losing the deal. Are they on a short timeline? Do they need to move quickly for a job relocation or some other reason?
• Financing Limitations: If you’re using a mortgage loan, remember that lenders typically won’t lend more than the appraised value. So the seller must lower the price or the buyer will need to bring extra cash to the closing table.
• Compromise: Be open to compromise, such as meeting the seller halfway. But before you do, determine whether or not the revised sale price still makes financial sense based on the appraised market value.
• Walking Away: Be prepared to walk away if the seller refuses to negotiate or the deal no longer aligns with your financial goals. Consider using a contingency for this purpose, as described below.

Protecting Your Deposit with an Appraisal Contingency

Home buyers often include contingency clauses within their purchase agreements, to protect their earnest money deposit in certain scenarios such as a low appraisal.

A contingency is a clause in a real estate contract that allows the buyer to terminate the agreement under certain conditions. More importantly, it allows the home buyer to recover their earnest money deposit if those conditions do arise.

There are several different types of contingencies commonly used by home buyers. Here, we will focus on the appraisal contingency, since it’s relevant to this discussion.

Definition: A home appraisal contingency is a clause in a real estate contract that allows the buyer to terminate the agreement if the property’s appraised value is lower than the agreed-upon purchase price.

If the appraisal comes in lower than the purchase price (and the seller is unwilling to negotiate), your contingency would essentially let you out of the contract while protecting your 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

Home buyers and their real estate agents usually 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 based on 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, supported by evidence.

How a Seller Might Respond During Negotiations

Let’s recap where we are in the negotiating process.

You made an initial offer to buy a house, and your mortgage lender 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 asking price 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, they might be more willing to negotiate downward.

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’ll have to decide 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 Affects Your Mortgage

When negotiating with a seller after a low appraisal, you also have to consider the mortgage loan factor.

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.