What If the Appraisal Comes in too Low?

What If the Appraisal Comes in too Low? - Contesting a Low Appraisal...

…how to prevent a low appraisal in the first place…

As real estate brokers in New York City, many buyers ask us what options exist if the appraised value comes below the contract’s purchase price. We explain how the appraisal rebuttal process works and how to prevent a low appraisal in the first place. Here are the most frequent questions buyers ask us. For this reason, we will draft this article like a Q&A.

  1. What happens when the appraisal is below the purchase price?
  2. What to do when the appraisal comes too low?
  3. How to contest a low appraisal?
  4. Can a buyer exit a deal if the appraisal is too low?
  5. Can a seller exit a deal if the appraisal is low?
  6. Is paying over appraisal a good idea in NYC?
  7. How can I prevent a low appraisal?
  8. What is an appraisal rebuttal and how long it takes?
  9. How often do appraisals get changed?

1. What happens when the appraisal is below the purchase price?

It means that the buyer’s lender will only issue a loan calculated on the appraised value instead of the purchase price. As a consequence, the buyer will experience a financing shortfall we call the “appraisal gap.” For example, let’s assume the contract price is $800k and the appraisal comes at $750k. The bank will no longer extend a mortgage of $640k ($800k x 80%) but will now lend $600k ($750k x 80%). This impact creates a shortfall of $40k, which is a financing gap for the buyer. IF the appraisal comes low, the bank will typically keep the loan-to-value unchanged. As a consequence, the buyer will have to put down an extra $40k.

A contract with an appraisal contingency or a minimum loan amount contingency will let the buyer get out of the contract to get his deposit back due to this low appraisal. Otherwise, the buyer needs to come up with an extra $40k down payment on closing day.

However, suppose there is a live deal. In that case, we recommend buyers and sellers try to keep the deal alive by utilizing various low appraisal response strategies, which we explain below.

2. What to do when the appraisal comes too low?

There are several approaches to react to a low appraisal in New York City.

  1. Buyer can increase the down payment. The most straightforward response to a low appraisal in NYC is for the buyer to increase the down payment to cover the financing gap. When the appraised value is very close to the contract price (think several thousand dollars), most buyers are comfortable slightly increasing the down payment. If the appraisal comes in way below the purchase price, buyers tend to be more reluctant. This consideration is even more true in New York City vs. any other city in America. For instance, if you are buying a co-op, increasing the down payment mathematically reduces your post-closing liquidity and puts the whole deal at risk of not meeting the co-op’s requirements.
  2. Get the seller to lower the contract price. The seller can agree to decrease the contract price to equal the appraisal value. Most sellers won’t agree to it, especially if they are not legally obligated to. Some sellers also feel that the appraisal is inaccurate. Think of an appraiser using comps of a forced seller during the COVID pandemic.
  3. The buyer and seller can try to renegotiate the purchase price. As brokers, we usually suggest buyer and seller meet in the middle. We encourage them to sign a new contract price as the midpoint between the appraisal and the purchase price.
  4. Buyer can apply for a loan with a new bank. When the buyer and seller disagree on a new price, the buyer may apply for a new bank loan. The new bank will order a new appraisal. This decision is like rolling the dices a second time! This decision will come at a cost because the buyer will have to pay for the bank origination fee and appraisal fee but could have higher leverage. We currently do not recommend this approach for two reasons:
    • In the context of rising interest rates, the new mortgage lock will presumably carry a higher interest
    • This can delay the co-op board approval process by several weeks, and in some cases, the buyer could be in default based on the deadline obligations in the contract.
  5. Buyer can challenge the bank appraisal. The buyer can challenge the bank and ask to reconsider the appraisal judging it too low. This approach only works if there are errors in the appraisal report. The buyer can also claim the appraiser did not include the best comps.

3. How to contest a low appraisal in NYC?

The buyer can contest a low appraisal by submitting an appraisal reconsideration with the bank. This process typically takes around two weeks. This approach will only work if the appraisal report contains factual errors. The buyer can also try to demonstrate the appraiser forgot key comparable properties. Mistakes can be incorrect square footage or inaccurate room count. It takes a couple of weeks to hear back once the buyer has submitted the reconsideration to the mortgage banker.

When the process is complete, the appraisal firm provides the buyer with an “Appraisal Reconsideration Response’.” This document addresses each additional comparable or factual error presented. The “Appraisal Reconsideration Response” may lead to 2 outcomes.

  • if the appraised value is higher, the bank can lend against the new value.
  • If there is no change, the bank will keep the mortgage size unchanged.

4. Can a buyer exit a deal if the appraisal is too low?

A buyer can only if there is an appraisal contingency in the contract. If the contract is non-contingent, the buyer has the legal obligation to close the deal by putting more money down.

5. Can a seller exit a deal if the appraisal is low?

Yes. The seller can push the buyer to cancel the deal by not agreeing to reduce the purchase price. Suppose the seller is unwilling to lower the contract price down to the appraised value. Therefore, the buyer can use his mortgage contingency to cancel the transaction.

6. Is paying over appraisal a good idea in NYC?

Yes and No. If you believe the appraisal is inaccurate, don’t put too much weight on it. However, if you feel that you’ve overpaid, you may want to include an appraisal contingency. This strategy might give you the option to renegotiate the price down the road.

In the grand scheme of things, the buyer will hold the property for a long time. As a result, a slightly higher purchase price is not pivotal in light of price appreciation.

7. How can I prevent a low appraisal?

There is no way to prevent an appraiser from issuing a low appraisal value. However, there are ways to mitigate a low appraisal risk by applying with multiple banks simultaneously. The buyer has to pay for multiple appraisals. However, this approach gives two chances on the appraisal. It will save time vs. waiting for one appraisal and then starting an entirely new process after a first appraisal comes too low.

To mitigate the risk of a low appraisal, the brokers can provide the appraiser with relevant comps. There’s no guarantee the appraiser will use the comps provided. However, those comps may help get a higher appraisal.

8. What is an appraisal rebuttal and how long it takes?

It is the process of challenging the appraisal. They take about two weeks after the buyer submitted the contested items in the appraisal.

It is not likely for an appraisal rebuttal to result in an increased appraisal value. Appraisers will review them and consider if there are factual (not subjective) errors. They may change the appraisal value if they have omitted obvious comps from the original report.

9. How often do appraisals get changed?

Very rarely. Since we started NestApple in 2017, we have not seen or even heard a single instance.

A buyer can submit an appraisal appeal to the bank if the appraisal has obvious factual errors. Therefore, it’s always possible that the appraised value will be increased. Even if the appraisal appeal increases the appraised value, it still may not match the contract price. At least there is no guarantee. Often, it’s faster to apply for a new bank loan. The new lender will order a new appraisal.

Your broker needs to determine if a property is at risk of a low appraisal. If you are buying in a hot market (such as the Catskills or the Hamptons during COVID times), we recommend buyers to apply for a mortgage with multiple banks early on. Doing this will give you the protection of two interest rate locks and the opportunity to hit the contract price with two separate appraisals.

By Georges Benoliel. The author is the co-founder of disruptive real estate start-up NestApple. Georges has been working in Wall Street for the last 17 years trading derivatives and mortgages with hedge funds. He has been an active real estate investor for over a decade. Mr. Benoliel graduated from HEC Business School in Paris and holds a Master’s in Finance from ESADE Barcelona.

Image credit flickr - Mike Mozart

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17 Responses

  1. Avatar Seneca says:

    Approaches are Irrelevant.

  2. Avatar E J Brown says:

    I’ve never seen a low appraisal. It is what it is.

    • I have.

      Often involves appraisers making rote adjustments and not following many other appraisal principles as well.

      Fortunately its rare-relatively. Its more frequent in divorces, or estate tax appraisals. Lets not pretend it doesn’t exist.

      I don’t like the way CoreLogic bandies the term around either. Its misleading. Their metric for determining high or low appraisal is also infantile and amateurishly facile.

      BUT sometimes appraisals do come in lower than market value. When they do, it needs to be acknowledged. Corrected if possible.

    • Avatar don says:

      Can the appraiser condition the terms of the sale by Reconditioning the house, and including the HOA dues for a year or two, buy-down the mortgage rate for the buyer, accepting the smelly cesspool, erecting a sound barrier between the r/r way yards. That’s the way several of the closed sales strengthened their prices.
      As is v as proposed will make a difference But will the lender allow it. Who is your client?

  3. Avatar John M Pratt says:

    There is no such thing as a “Low Appraisal”. The appraised value is the appraisers opinion of the market value of the property based on his/her research and analysis. There are Sale (contract) prices to high or to low. Most potential buyers in the market have no idea of the value of the home they are making an offer on, they rely on the broker to protect them. It is the appraisers job to provide the “Lender” with an accurate market value for the lenders protection and the appraiser has no obligation to the potential buyer or seller. Maybe the listing price was to high.

    • Avatar don says:

      Is their such a thing as an OVER listing which has been reduced 5 times, still with no interest? Is their such a thing as a low sale which sold to a relative? Does anybody verify?

  4. Avatar Joe says:

    So someone in Wall Street for the last 17 years and hedge funds wants to discuss appraisals because he has a “disruptive innovation” in real estate. Leave appraisal to appraisers. The premise of this article belongs on mortgage or broker website, not appraisal. The objectives of the author (advocate for price) vs appraisers (advocate for market value) are fundamentally different. We must hold ourselves up to a higher standard.

    • Baggins Baggins says:

      It’s a clever marketing play from a flat rate realty company. It’s an easy read and good for new people.

      10. Blame incompetent realty for both listing too high, and the buyers agent for walking a buyer in too high without proper price negotiation. If you have to find a new lender, it’s probably a good idea to find a new realty agent too.

      Where I’m at buyers are falling over each other for a buy, they’re coming with 50k cash over value up front in contractual terms. The thing is, they’re all coming here from NY and CA, moving stacks of cash. It would not be surprising the other side of that coin is falling expectations in big cities.

      • Avatar don says:

        The markets always in FLUX, Use all your tools at estimating the value. Remember demand v supply is always critical. Our MLS’s provide wonderful features to illustrate our positions.

        Define the problem first; is it todays estimate, or tomorrows.

  5. Stop quibbling over the term low. Author explained low relative to the contract price. Not derogatorily low.

    Its a well written article. The one other step the author left out was going back to the seller and asking them to finance the shortage or gap amount.

    Afterall, THEY are the ones that priced the property above it’s supportable market value. Second Mortgages or deeds of trust were common in the 1950’s and 1960’s before conventional 90%-95% loans became widespread.

    Sellers can carry the paper themselves OR they can immediately discount it (say 50% for a new unseasoned 2nd TD) and sell it to investors that specialize in them.

    The article attempted to intelligently explain options OTHER than attacking the appraisers through regulators. We should (IMHO) support authors who make the effort to educate sellers and buyers.

    • George Benoliel on Facebook George Benoliel on Facebook says:

      Thank you!

    • Avatar don says:

      And in the 1930s thru the 50s Realtors sold properties with contracts of sale which were still available thru the 1970s what a mess that was. The C.A.R. campaigned against those contracts and many were found Illegal.

      Just think when those tranches of trust deeds bought by the Chinese several years ago are taken back to china in foreclosure, what will our politician do?. The Japanese had all those trophy properties and they had to leave them here in the good old USA.

      The Chinese are having financial problems and those bonds and investments are not as popular as they were. IS ANY of your retirement involved?

      My experience was in appraising only for 57 years in California, Arizona, New Mexico & Nevada, some of those years I had a brokers license some I had an appraisers license. Many years no license was required

    • I agree. Verbiage needs to change!! We offer an OPINION ..
      This is more of us perpetuating the BAD APPRAISER garbage

  6. Avatar Bill Johnson says:

    Want to hear a true story?

    Considering in the past 7 days I’ve cut value by over $1,000,000 (purchase price / appraised value) this article is good timing (one was by $350,000). It normally goes like this, the property is listed by the agent ($1,200,000 to $1,250,000), and then gets bid up by $100,000+ when every offer states they will beat any other offer by $10,000. It sounds like a fun game that every one gets to play and yes every party knows the truth, but the real truth is that the appraiser gets screwed out of time and money both during the initial process, and post process (Tidewater / Reconsideration of value, etc.).

    Considering the author states “Very rarely. Since we started NestApple in 2017, we have not seen or even heard a single instance”, I’m glad this shitshow of a process serves no other purpose then to waste millions of manhours from the appraisers over the decades.

    Seeking the truth, knowing the truth, and then lying to the appraiser about how you think the value is $100,000 higher from 3 days prior (DOM), what a bunch of puppets on strings we are.

  7. Avatar Bryan says:

    Time for an extended vacation.


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What If the Appraisal Comes in too Low?

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