What Happens if the Appraisal comes in LOW?

What is an Appraisal?
One of the contingencies in a real estate purchase contract when the buyer is securing a mortgage, is that the property must appraise for the purchase price. A home appraisal is a report provided by a licensed professional required by the lender to ensure that the purchase price is the fair market value of the property you’re buying.
Appraisal reports usually run around $500-800 for a single-family house and a little bit more for a multifamily property--the report is paid for & belongs to the Buyer. The lender will order the appraisal, using an independent third-party professional who has no interest in whether or not the transaction goes through. 
How an Appraisal WorksThe appraiser will visit the property and walk through the inside and outside, taking measurements, photos, and notes--the appraiser needs access to every room. It won’t take long, about 15 minutes. After the on-site review, the appraiser will look at comparable properties (aka “comps”) & write a professional report indicating the appraised value of the property.
Some of the key factors an appraiser looks for include:

• Age of the property
• Construction details such as wood vs. brick
• Date of major updating or remodeling
• Square footage: particularly the living area
• Number of bedrooms and bathrooms
• Amenities such as an attached garage, backyard deck, or swimming pool
• Deferred maintenance that reduces current property value (ex older roof)
• Lot size and configuration
• Location factors can impact value, such as being next to a greenbelt vs. backing to a busy road
• Neighborhood characteristics such parks and school ratings
• Current trends in the local housing market
• Comparable sales of similar properties within the last few months

Comparable homes sold in the most recent 90 days are hugely important in the sales comparison approach. Homes sold over six months ago are less relevant.
Whether you’re buying, selling, or refinancing, a home appraisal that comes in too low could put the entire transaction in jeopardy.

What happens if the appraisal is lower than the purchase price?
The possibility of a low appraisal is why home purchase contracts are often written with an appraisal contingency. Should the home fail to appraise for its contracted purchase price, the contingency clause allows buyers to re-evaluate &, potentially, walk away without losing the deposit. FHA loans require this contingency in any purchases financed with FHA mortgages.
As a home buyer, it’s risky to waive your appraisal contingency as you may be on the hook to make up the shortfall or forfeit your deposit if you walk away. You need to talk to your Realtor & your mortgage lender to make sure that you fully understand your options.
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Here’s an example:

• Agreed upon purchase price of $200,000 for a home
• Buyer is using an FHA loan; the maximum loan amount would be $193,000 (3.5% minimum down payment)
• The appraiser values the property home at $190,000 which means there is a shortfall or gap in the appraised value vs. the purchase price
• The buyers maximum mortgage size drops to $183,350 — ( again, 3.5% down payment is required based upon 190k)
• With the reduced loan amount, the buyer is now $9,650 short of the agreed-upon purchase price of 200,000 

Unless the seller agrees to lower the price to match the appraised value, the buyer will have to increase their down payment to get the same mortgage & interest rate. Rather than paying $7,000 down they would need to pay $16,650 down to buy the same $200,000 house because they would have to pay the difference in the appraisal shortfall.
A buyer that plans to put 20% down on a house may have the option to increase the loan amount in order to make up an appraisal shortfall. Instead of 80% LTV (loan to value), you could opt to put 10% down instead---this may have other implications such as PMI or a different interest rate so again, it’s important that you talk to your lender BEFORE you jump into the home buying process & talk through these options so that you can make the best possible offer in a competitive market.

Options for a low appraisal
When a home appraises for less than its purchase price, there are a few potential options:

• If the Buyer has waived the mortgage then the appraisal is irrelevant in relation to the Seller & will not impact the purchase price
• If the Buyer has offered to pay any of the gap/shortfall then that will partially determine the next options (ex. If there’s a $5k appraisal gap coverage then using the same example as previous the seller would reduce the purchase price to $195k because the buyer agreed to cover a $5k shortfall
• Seller and buyer renegotiate a new, lower home sale price
• Buyer increases the down payment to meet new down payment minimums
• Seller and buyer cancel the home purchase contract 
• Buyer or seller requests an appraisal rebuttal

How to rebut or appeal your appraisal
The home buyer, or seller in some cases, can request an appraisal rebuttal or challenge. This is a formal process in which the buyer’s lender submits a request for the appraiser to re-examine the appraised price of the home. Your Realtor can submit additional comparable homes to try & get the appraiser to reconsider the value.

There are a few things to keep in mind:
First, the Lender will have to submit the proposed comps to the underwriter & if the underwriter does not think that they are relevant comps they will decline the request to refute the appraisal. Second, it is crucial to note that the comparable homes MUST be very similar---similar style, condition, location, etc. You can’t compare a Cape to a Contemporary for example, or a 1200 square foot home to one that is 2400 square feet, or one that has recent updates with one that is not. Third, even if you make it past the Underwriter, these rebuttals often have little or no effect on the appraisers report except to take up time & prolong the stress for all parties. The appraiser will submit a rebuttal response, stating that value has been changed based on new evidence, or that it wasn’t changed and why. It's not impossible & if the appraised value comes in significantly low it's certainly worth the effort but you should know that the chances are very slim that the appraisal will reconsider their original report.

The good news for sellers is that many buyers in today’s market seem to have the cash available to either waive the appraisal contingency or offer to pay a specified amount that they’re willing to cover in the event that there’s a shortfall. This is an important strategy that your Realtor should work to negotiate when determining which offer is the most competitive. Likewise, for a buyer, if you have the funds available, offering a specific amount of funds that you can offer in the event of an appraisal shortfall may be the deciding factor between you & another offer in a multiple offer situation.