Aug 294 min read

I'm Buying A New-Build Condo, And The Appraisal Came In Low. What Can I Do?

One critical step when purchasing a property is the appraisal, which determines the property’s market value.

Most appraisals come back at the price you need, but what happens if the appraisal comes in lower than the agreed purchase price? This article will guide you through the implications of a low appraisal and your options if you are in this situation. This information is for everyone in the process of buying a property and worried that their appraisal will come in low or that it already did.

We've recently seen many pre-construction condo appraisals come in lower than they were purchased for, and I believe this article will help you if you or someone you know is in that situation.

My Experience With Appraisals

I've helped over 50 home buyers purchase their first or next home.

And I've helped over 250 clients with mortgages if you include refinances. Even though I completed a graduate certificate in financial services, appraisals were not a topic that came up. It was always, "How do you calculate your mortgage payment?" or "What does a 5% interest rate mean for the cost of the mortgage?"

The irony of the school courses never mentioning appraisals is that every purchase requires an appraisal to confirm the home's value.

Appraisals are, without exaggeration, one of the most important aspects of any transaction, purchase, or refinance. In the past ten years leading up to 2024, most appraisals came in at the required value to finalize the purchase. That said, we've seen many appraisals come in lower over the past year as home prices have fallen.

Keep reading to learn more about their significance and why they matter.

Why Appraisals Matter

Appraisals are critical because lenders use them to determine how much they are willing to lend.

If an appraisal comes in low, the lender will likely reduce the loan amount, affecting your ability to proceed with the purchase at the agreed price. A low appraisal can create a gap between the loan amount and the purchase price you’ll need to cover. Let's go through an example.

Imagine you are purchasing a $100,000 home (low, I know, but an easy number to show calculations). Assume you are putting a 20% down payment and applying for a mortgage from the bank for the other 80%. Let's also assume the appraisal the lender ordered came in with a price of $90,000.

How does a lower appraisal affect your mortgage and purchase in this example?

In a normal $100,000 purchase scenario, you'd put down $20,000 as a down payment and receive a $80,000 mortgage from the bank.

If the appraisal comes in at $90,000, the bank will only give you 80% of the appraised value, which would be $72,000. This means you'd have $92,000 total. $8,000 short of the $100,000 you purchased for.

What Are Your Options If The Appraisal Comes In At A Low Price?

If the appraisal comes in lower than expected, you have some options:

Negotiate a lower purchase price: You can try to renegotiate with the seller to reduce the price to match the appraised value.
Increase your down payment: You can bridge the gap by increasing your down payment to cover the shortfall between the appraised value and the purchase price.
Challenge the appraisal: If you believe the appraisal was incorrect, you can ask the lender to order a second appraisal or provide additional information to support a higher valuation.
Walk away from the deal: If the financing contingency in your purchase agreement allows it, you may have the option to walk away from the deal without penalty.

How to Avoid Issues with Low Appraisals

While you can’t control the appraisal outcome, you can take steps to minimize the risk of a low appraisal:

Do your research on comparable properties: Before making an offer, ensure the purchase price aligns with recent sales in the area.
Include an appraisal contingency in your offer: This would be included in a condition of financing, allowing you to back out of the deal if any portion of the financing fell through.
Work with a knowledgeable mortgage broker and real estate agent: They can guide you through the process and help you make the most reasonable offer to get the offer accepted and appraisal value to come in.

Final Appraisal Thoughts

A low appraisal doesn’t have to derail your property purchase, but it’s important to understand your options and be prepared to act.

Whether you renegotiate, increase your down payment, or challenge the appraisal, having a plan will help you confidently navigate the situation. One word of warning -challenging appraisals is very difficult. Most appraisers aren't willing to increase their price after they finalize their report. Even if you believe them to be off, we've only seen challenges succeed a handful of times, and even then, the appraiser didn't increase the price much.

And a final note: if you're putting a down payment of less than 20% and have no additional savings, make sure you aren't overbidding on the property. If that appraisal does come in low, how will you come up with that down payment?

Summary (TL;DR)

A low appraisal can create a gap between the loan amount and the purchase price, affecting your financing.
Options include renegotiating, increasing your down payment, or challenging the appraisal.
Preparation is key: Research comparable properties, use contingencies, and work with knowledgeable professionals to minimize risks.

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