When a Bay Area Home Appraises for Less Than the Purchase Price

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

But when the appraiser comes around to determine the market value, he or she decides the home is worth less than the purchase price. What now? What happens when the Bay Area home you want appraises for less than the offer amount?

As a home buyer, you basically have three options in this scenario:

• You could ask the seller to lower the sale price to meet the appraisal amount.
• You could pay the difference out of pocket, with a bigger 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. Let’s explore them…

Asking 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. That’s one option, 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.

If you do ask for a price reduction, you might even use the appraisal results to support your argument. This is a common strategy among home buyers.

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. So there’s less chance the seller will reduce the asking price.

Paying More Money Out of Pocket

The Bay Area real estate market can be highly competitive at times. Tight supply conditions and strong demand from buyers can lead to a seller’s market. In this kind of scenario, price reductions are less common. Sellers often receive multiple offers during 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.

If you’re using a mortgage loan to help finance your purchase, the home appraisal could partly 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 doing so create a financial hardship for you?

Walking Away 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.

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 up an offer to buy a house, the offer can be contingent (or dependent) upon certain events or conditions. For instance, your offer might be contingent upon a successful home inspection. This gives you a way to back out of the contract if the inspector finds serious defects you’re unwilling to accept.

The same goes for the appraisal. You could include a contingency that allows you to cancel the deal if the property fails to appraise for its contracted purchase price. More importantly, 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, in the form of a lost deposit. So tread carefully and make sure you understand the repercussions of such a move.