How to Handle a Low Home Appraisal in the Bay Area

Bay Area home buyers occasionally find themselves in a situation where the home they want to buy appraises for less than the amount they’ve agreed to pay. It doesn’t happen often, but you should still be prepared for it.

1. Buyers have three main options in this scenario: ask the seller to lower the price, pay the difference out of pocket, or walk away from the deal.
2. Asking the seller to lower the price might work in a slow market, but it’s less likely in a competitive market where multiple offers are common.
3. Paying the difference out of pocket requires a larger down payment and may not be financially feasible for all home buyers.
4. Walking away is an option, but buyers should have an appraisal contingency in place to avoid losing their earnest money deposit.
5. Waiving contingencies can strengthen an offer but increases financial risk, especially if the appraisal comes in low.

When a Bay Area Home Appraises Low

You get pre-approved for a mortgage loan and start house hunting. You find a home in the Bay Area that checks all of your boxes and falls within budget. So you make an offer, and the seller accepts it.

But when the appraiser comes around to determine the market value, they decide the home is worth less than the purchase price. What now?

• You could ask the seller to lower the sale price to meet the appraisal amount.
• You could pay the difference out of pocket, by making a larger down payment.
• You could walk away from the deal and move on to the next property.

So, which way do you play it? Ultimately, the path forward is up to you. And the best path can vary from one buyer to the next, for a number of reasons. So let’s explore all three scenarios.

1. You could ask the seller to reduce the sale price.

When a Bay Area home appraises for less than the purchase price, some buyers will ask the seller to reduce the sale price. The logic here is that the appraiser has determined a lower value for the house, so the seller should lower the price.

That’s one way to play it, but it might not go over well in a hot real estate market. So be sure to consider local market conditions before moving forward.

In a slower market, the seller might be willing to lower the price to reflect the appraisal. Sellers are generally more motivated in a slow real estate market, because they can’t be sure when the next offer will come along.

In a hot market (with quick sales and strong competition among buyers), the seller might not budge on the asking price. They’ll be more confident about landing more offers, especially if they’ve already received more than one.

If you do ask for a price reduction, you might even use the appraisal results to support your argument. It’s a way of saying: “This is what the house is worth in the current market, so this is all I’m able to pay.”

2. You could pay more money out of pocket.

With limited supply and strong demand, the San Francisco Bay Area real estate market often favors sellers rather than buyers. In such times, price reductions are less common.

Sellers often receive multiple offers at times like these, sometimes for more than the asking price.

That brings us to the second option. If a Bay Area home appraises for less than the purchase price, and the seller refuses to lower the price, the buyer could pay the difference out of pocket.

By making a bigger down payment, you could close the gap between the appraisal amount and the sale price. This is one way to keep the transaction moving forward, rather than hitting a dead end.

If you’re using a mortgage loan, the appraisal could determine how much you are able to borrow. So you’ll have to make a decision in the event of a low appraisal. Can you afford to pay more out of pocket to reach the purchase price? Or would that create a financial hardship?

3. You could walk away, ideally with earnest money intact.

If you can’t afford to pay more out of pocket, it might be time to move on to the next house.

This is a common scenario in the Bay Area real estate market, especially for home buyers who are on a tight budget. Not all purchase offers turn into contracts.

But there are some important considerations here, such as the earnest money deposit.

If a buyer backs out of a deal due to a low appraisal — but they don’t have an appraisal contingency written into the contract — they run the risk of losing their deposit.

When you write an offer on a house, you can make it contingent upon certain conditions like a satisfactory home inspection. This gives you a way to back out of the contract if the inspector finds serious issues.

You could also include a contingency that allows you to cancel the deal if the property fails to appraise for its contracted purchase price. This kind of contingency allows you to recover your earnest money deposit.

Some Bay Area home buyers choose to waive their contingencies, in order to make their offers more attractive. There’s some logic behind this, especially at times when the market is highly competitive. But it also brings additional risk into the picture.

5 Related Articles on This Subject

We’ve created a large library of tutorials for Bay Area home buyers. Here are some helpful guides that relate to home appraisals, offers, and similar subjects.

• The home appraisal process explained
• How appraisers determine the market value
• How earnest money deposits work in California
• When a seller can keep the earnest money
• When can I back out of buying a home?