You’ve made an offer on your dream house, the inspection didn’t raise any serious issues, so now you only have to get the home appraised and wrap up your home loan, and you can start planning your move.

How exactly could an appraisal derail your home purchase? Because the lender doesn’t want to lend you more than the home is worth.

“They want to check their investment,” says Joanne McCoy, an agent in Lincoln, Nebraska, who works with 69% more single-family homes than the average agent in her area.

“They want to make sure the property has appraised for the right value in case something goes wrong down the road and the bank ends up owning the house.”

A mortgage is a secured loan — the house and land it sits on serve as collateral for the loan. If a homeowner defaults on their payments and the home goes into foreclosure, the bank takes possession of the collateral, also known as the property. And if the homeowner owes more on the loan than the house is worth in the current market, the bank will lose even more money. So an appraisal is a bank’s method of verifying the home’s value before the bank will agree to give the homeowner a loan.

If the appraisal comes in at or above the sales price, the deal can continue. But if it comes in below the sales price then you, the buyer, won’t be able to get a loan for the full amount. It’s a rare occurrence — one study found that a lower-than-sales-price appraisal occurred in fewer than 10% of home appraisals — but it can happen.

At that point, you have several options. Walk away from the house, put down more cash, or negotiate with the seller.

If you’re in this situation and wondering what to do, here are the stories of three buyers who faced the decision about what to do when their appraisal came in low.

Cross-country relocation with a hitch

When David and Abra Robbins needed to relocate from Alaska to Nebraska, they expected the long-distance move to be their biggest challenge — not their appraisal.

Abra had just graduated medical school and been accepted to the residency program in Lincoln, Nebraska. They flew down and stayed with family while their agent, McCoy, showed them several homes. After finding one they liked, they made an offer with an escalation clause. This means that if the seller gets a better offer (up to a predetermined limit), the offer price automatically “escalates”; the seller still gets their better deal, and the original buyer doesn’t lose the house.

“The list price was $198,000,” Robbins says, “and we offered $200,000, with an escalation clause.” Three other offers drove the price up to $210,500.

In their escalation clause, David and his wife said they would pay up to $3,000 over the appraisal, but they never expected that to truly happen.

The appraisal came in at $205,000, however. Robbins thinks that a fast-moving market, with comparables that lagged actual market conditions, influenced the low number.

“We wish we hadn’t gone up to $3,000 above the appraisal,” he admits, but they didn’t think about walking away. “We didn’t want to rent, and we wanted our monthly payment to go into equity.”

McCoy says that one of the first things she’ll do when an appraisal comes in low is contact the listing agent and start a new discussion. The listing agent will typically ask if the seller will agree to reduce the price to the appraisal value, “which is what most buyers expect the sellers to do.”

“But the seller may or may not agree to that, and the buyer options are to make up the difference,” she adds. In this case, the seller came down in their price from $210,500 to meet them at $208,000, $3,000 above the purchase price, and the Robbins made up the $3,000 difference out of pocket.

An investment deal on the line

Justine Chan is an experienced real estate investor who ran into an issue when buying a residential building in South Bronx, New York, in July 2019. She’d offered the seller’s asking price and hadn’t included an appraisal contingency in her offer. But then the appraisal came in 8% below the offer price.

She thinks the appraisal came in low because “the comps were difficult, as this was the nicest building in the area.” It was only ten years old, much newer than the comparables. She still wanted the building, so she decided to ask the seller for a $5,000 credit at close so that she could have some extra cash reserves after the purchase. The seller accepted her offer and gave her $5,000 back at closing.

Oftentimes, sellers will be willing to negotiate with a buyer because they know another buyer will likely encounter the same problem with an appraisal. And it can be tough for many buyers to bring more cash to the table, particularly if they’re home shopping with a strict budget. The seller knows that if they don’t negotiate, they could torpedo the deal, waste time with their property off the market, and lose the interest of other buyers.

Justine says that she’d absolutely make the same decision again. “I researched the comps used and still felt confident that my offer price was right,” she says. And as an investor, she had the cash available to make up the difference.

Multiple offers drive up the price

When Sarah Yost and her fiance walked up the front path to an open house, they knew it was the home for them. But the listing agent told them that the seller had already received several aggressive offers — and, in fact, had almost canceled the open house. To beat out the other buyers, they had to write an impressive offer.

“The asking price was $279,000, and we offered $300,000 with an escalation clause,” Sarah says. As mentioned, an escalation clause gives the buyer the opportunity to beat out another buyer’s higher offer, and this clause said that they would beat any other offer by $1,000. They also waived the home inspection and agreed to pay $5,000 above the appraisal.

A heated bidding war, with multiple rounds of offers, drove the price up to $323,000, a full $44,000 more than the asking price. The large gap between the asking price and offer made several appraisers nervous, and they wouldn’t even appraise the house. When the bank finally found an appraiser, the home appraised at $300,000.

Sarah attributes the issues with the appraisal to the home’s unique nature. It wasn’t a ranch or split-level house, like most of the comps; instead it was a mid-century modern home with high ceilings. Plus, the majority of its square footage was below grade; even though the home had a walkout basement, in Nebraska, these types of basements don’t count toward the home’s total square footage. “So while our upper level was 800 square feet, the lower level of 1,300 square feet didn’t count toward our appraised value,” she explains.

Negotiations resumed, but the seller wouldn’t budge on price, confident that they could go back to the other interested buyers. In the meantime, Sarah and her partner did more research on the house and discovered sewer problems from 2018. At that point, the seller provided them with updated seller’s disclosures that revealed the house had more issues than they’d initially thought.

Armed with this new information, they were able to talk the seller down to a $312,000 price with the $300,000 appraisal and decided to make up the $12,000 difference in cash.

McCoy says that if the buyer has the extra cash and an appraisal comes in low, it could be a good idea to use that cash to make up the difference for several reasons. “Maybe there’s some updating to the home that the appraiser doesn’t give much value to,” she explains, “but the buyer says — look, this is stuff I’d have to pay for on another house, and it’s already done here.”

The couple closed in March of 2020 after pushing for a quick close due to COVID-19. They wish they’d done more due diligence on the house and have had a few surprises since moving in (such as a leaking roof). But they have such a great rate on their mortgage that Sarah thinks they’ll save money in the long run.

When the appraisal comes back lower than the offer, it can feel like the end of the world. But you do have options, up to and including walking away from the purchase.

While each of these homeowners eventually decided to buy the property, their agent helped them negotiate and receive concessions from the seller based on the low appraisal. If you find yourself in an unusual homebuying situation, you’ll want a great agent on your side.