In a competitive seller’s market, where bidding wars and above-asking-price offers are the norm, it’s easy to assume every home will appraise at or above the agreed purchase price. But even in strong markets, low home appraisals happen—and when they do, they can jeopardize the entire deal.
So, why do low appraisals occur when home prices are soaring, and what can buyers, sellers, and real estate agents do about it? Let’s break it down.
Why Do Low Appraisals Happen in a Hot Market?
An appraisal is an independent assessment of a property’s fair market value, typically ordered by a lender to ensure the home is worth the loan amount. While market demand may drive prices higher, appraisals are grounded in recent comparable sales, not buyer sentiment or bidding wars.
Here’s why a home may appraise low even when the market is hot:
1. Outpaced Comparable Sales
Appraisers rely on recent sales data—usually from the last 3–6 months. If a property goes under contract for more than nearby homes recently sold for, the appraisal may not match the offer price. In fast-rising markets, sales data often lags behind actual market conditions.
2. Overzealous Bidding
Buyers caught in bidding wars may offer far above asking price to secure the home. But appraisers aren’t concerned with how much a buyer is willing to pay—they’re focused on what the home is likely worth based on market evidence.
3. Unique or Over-Improved Homes
Homes with custom upgrades, additions, or unique features may not have suitable comps nearby. Without comparable sales to support the valuation, appraisers may undervalue these homes relative to buyer expectations.
4. Appraiser Variability
While most appraisers follow industry standards, they still exercise professional judgment. In areas with fewer comps or fluctuating values, different appraisers might arrive at different numbers.
What Are the Risks of a Low Appraisal?
A low appraisal can quickly unravel a sale. Lenders base the loan amount on the appraised value—not the purchase price. If the appraisal comes in lower than expected, the buyer’s financing may fall short. This can lead to:
- Renegotiation of the sale price
- A larger down payment required from the buyer
- Termination of the purchase agreement
For example, if a buyer offers $550,000 for a home, but it appraises at $510,000, and they’re putting down 10%, the loan would be based on $510,000—not $550,000. That’s a $40,000 shortfall the buyer may need to cover out-of-pocket or renegotiate.
How Sellers Can Prepare for Appraisal Gaps
If you’re a seller, a low appraisal doesn’t mean you priced your home poorly—but you should prepare in case the appraisal doesn’t meet the offer price.
1. Request a Pre-Listing Appraisal
Some sellers order a professional appraisal before listing to get an objective baseline and help defend pricing during negotiations.
2. Keep a Record of Upgrades
Document renovations, improvements, or maintenance work. Appraisers may adjust value based on upgrades—especially if you provide receipts, permits, or before-and-after photos.
3. Be Present on Appraisal Day
While you don’t want to hover, being available to highlight features or provide documentation can help clarify the home’s value.
How Buyers Can Handle a Low Appraisal
Buyers have a few options if the appraisal comes in below the purchase price:
1. Cover the Difference
If financially able, a buyer can bring more cash to the table to cover the appraisal gap.
2. Negotiate a Price Reduction
Some sellers are willing to meet buyers halfway—or lower the price—to keep the deal alive.
3. Split the Difference
A common compromise: the buyer and seller agree to meet in the middle. The buyer increases their down payment slightly, and the seller reduces the price.
4. Dispute the Appraisal
Buyers can work with their agent and lender to challenge the appraisal. This may involve submitting recent comps or pointing out inaccuracies in the report. However, reversals are rare unless there’s clear evidence of error.
5. Walk Away
If the financing doesn’t work and no compromise can be reached, the buyer may have the right to cancel the contract (depending on contingencies).
What Realtors Can Do to Bridge the Gap
Real estate agents play a critical role in avoiding and resolving appraisal issues.
- Price Strategically: Use the most recent and relevant comps to justify your listing or offer price.
- Provide a CMA: Share a comparative market analysis (CMA) with the appraiser to support the price.
- Stay in Communication: Be proactive about checking in with the appraiser, providing documentation, and answering questions.
A seasoned agent can also set expectations early, preparing clients for the possibility of a low appraisal—especially in fast-moving markets.
Final Thoughts: Low Appraisals Aren’t the End
A low home appraisal in a seller’s market can be frustrating, but it’s not uncommon—and it doesn’t have to derail your transaction. With preparation, communication, and the right strategy, buyers and sellers can navigate appraisal gaps and keep deals moving forward.
Need Help with a Home Appraisal?
Whether you’re buying, selling, or representing a client, our certified appraisers are here to help.
Contact us today to schedule an appraisal or discuss your specific needs.