Buyers: Here’s Your Negotiation Strategy for When the Appraisal on a House Comes in Low

You hit the real estate Holy Grail: You found your dream house, and the seller accepted your offer. But after the appraisal, the tides have turned — the price initially seemed right, but the appraiser doesn’t feel the same way. So, what can you do? Do you know how to negotiate with a seller after a low appraisal?

After a low appraisal on your dream home, you may assume that this is the end of the road because it may mean the termination of your mortgage loan if you can’t work out a deal. However, there are many options that allow you to turn things around so you can come out on top and still snag that dream home. A low appraisal presents an opportunity for you to negotiate with the seller.

Here’s how to be proactive and take charge following a low appraisal.

Figure out why the appraisal is low

The first item on your to-do list should be to figure out why the appraisal came in low.

An appraiser uses recently sold listings to help figure out a value for your dream home. Here’s how it works: The appraiser will find at least three nearby comparable homes (“comps”) that are about the same size and age as yours, which were sold recently (typically within the past three to six months), and the appraiser will then use regression models and their market knowledge to come up with the value of your coveted property.

There are many reasons why the appraisal can come in low; one cause may be a shifting market. “It’s good to understand the market of the moment,” says Madison-based real estate agent Lynn Holley, who works with 72% more single-family homes than the average agent in Madison. “Know: what is the increase on an annual basis, or even over the last three to six months.”

Holley also advises buyers to do everything they can to be flexible. She says, “Negotiating after an appraisal comes in low is difficult, and there are only a handful of things a buyer can attack.”

So the key is to arm yourself with information for the negotiation.

A shifting market 

As Holley points out, the current market can often be the driving factor behind a low appraisal.

In 2020 especially, the economy is volatile, and the future remains uncertain for various markets and industries across the board, real estate included. So depending on how long the home has been on the market, the price may be outdated due to shifts and calibrations in the market.

The comps aren’t really comparable

The comps used by the appraiser may be too old (the homes were not sold very recently), or they might be too different at a basic level from the property you’re trying to buy.

If the appraiser only looked at sold listings while there are pending sales that might be more comparable to your would-be property, that’s something else that can affect a home’s appraised value.

Short sales in the neighborhood 

In some cases, short sales may be to blame for a low appraisal. Short sales occur when a homeowner, in agreement with their lender, sells their property for less than what they owe on it.

A short sale can happen when home values drop following the original home purchase (or its refinance), or because the homeowner takes out equity loans and overextends themselves. Short sales can occur in spurts if home values in a particular neighborhood suddenly take a nosedive; this is rare, but when it happens, it may lead to skewed and inaccurate comps.

Additionally, you may be dealing with an appraiser who is inexperienced or doesn’t know the nuances of your local market, or it could be that the home is legitimately overpriced. Reasons like these can be the root of a lower-than-expected appraisal.

Once you’ve pinpointed one or two possible factors that may have contributed to a low appraisal, you can use that knowledge to your advantage.

Best solution: Consider getting a second appraisal

In the event that there are no clear-cut signs as to why you’ve received a low appraisal — or if poorly chosen comps or inexperience are the root of the problem — it may be worth getting a second appraisal from a different appraiser.

While this will cost you both time and money, it could end up being worth it in the end if you get a more accurate appraisal as a result.

A justified low appraisal

What if the appraiser was right, and the house is actually overpriced? If you aren’t going to get a second appraisal to combat the first one, then it’s time to start thinking about where to yield to the seller, or whether to walk away entirely. Here’s where it’s time to build and flex your negotiation muscles, and also explore various options.

Assess your situation and figure out where there is “wiggle room”

If the low appraisal makes logical sense, don’t despair — you have options. As bestselling author and life coach Marie Forleo says, “everything is figureoutable.” This is a figureoutable situation!

First, ask yourself these questions:

• Do you have extra money available to put towards the difference between your offer and the appraisal?
• Are you able to offer the seller more time to stay in the home, or suggest a rent-back agreement? (With a rent-back agreement, the seller stays in the home post-closing, giving them more time and giving you leverage.)
• Can you offer to take care of more repairs from the inspection?
• Are you able to offer flexibility in alternate ways?
• Is there an appraisal contingency in the contract?

Time to approach the seller and negotiate 

Once you’ve explored possible reasons for the low appraisal and where to go from there, it might be time to negotiate with the seller.

Arm yourself with information and know your leverage

You do have leverage — you are the one willing to pay money for this home. And it’s likely that the seller doesn’t want the deal to fall through, either.

When you approach the seller, share any information about why you think the appraisal was low (for example, a shifting market). Then use this information to state your case for what you think should happen to save the deal.

For instance, if a shifting market is the reason for the low appraisal, bring the numbers and information to support that theory and ask the seller to lower the price to reflect the new market realities. If the appraiser used the best comps, you can ask your agent to run a CMA (comparative market analysis) to help support that. If the home is truly overpriced, the comps should help you make your case, along with the appraisal itself.

It will benefit you to point out to the seller that a new buyer may run into the same appraisal problem down the road, should they choose to walk away from the deal (This puts you in a position of power, too).

Offer concessions in negotiation

Review the questions you asked yourself above, and decide which — if any concessions — are a possibility.

• Are you able to pay more money for the home?
• Could you and the seller agree to meet in the middle?
• Can you offer a rent-back agreement to the seller?
• Are you able to locate an appraisal contingency in the contract? And can you use it to your advantage?
• Can you alleviate the seller of certain home repairs and cover them yourself?
• Can you offer to take care of large, cumbersome furniture or items in the house for the seller, like a pool table they don’t want anymore, so they don’t have to deal with moving it?
• Can you take any other items off the seller’s plate, so they don’t need to deal with it themselves?

Think of all the ways to increase your appeal as a buyer, and use them to your advantage when negotiating.

Talk to your agent

For additional input and a broader scope of your options, talk to your agent. They’ve likely been doing this much longer than you have, and they may have some insights and ideas you couldn’t have arrived at on your own.

Ask the seller what they can do for you

To keep the deal moving along, some sellers may be willing to lower the sales price. It’s worth asking the seller to do so, and then continue to evaluate different options.

Some sellers who own their house outright may be willing to finance the sale for you. In this instance, you would pay the seller directly every month instead of your mortgage lender. (Should you go this route, make sure you draw up an agreement and have an experienced real estate lawyer help you navigate this kind of deal.)

Be prepared to walk away

The biggest bargaining chip you have in the negotiation process is yourself — moreover, your ability to walk away. There will always be more houses, and a dream home that doesn’t work for you isn’t, in fact, a dream.

By always being willing and prepared to walk away, you remain in a position of power. And, to put a real estate-themed spin on the classic Rolling Stones lyric: While you may not get the home you originally wanted, you will eventually find the one you needed.

It’s not worth paying too much for a house, which could put you in a financially precarious situation as a result. Buying a home is meant to increase both stability and wealth-building efforts; if you pay too much for a house and end up underwater on your loan, you could damage your personal and financial stability.

… Or finish negotiating and collect your new set of keys

If the new offer or arrangement is attractive to both parties, go for it!

And after the paperwork is signed and your keys are in hand, give yourself a well-deserved pat on the back for making the situation work for you, and turning a negative into a positive.

Header Image Source: (Jacob Lund / Shutterstock)