As the Colorado housing market heats up this spring, we're seeing a familiar trend re-emerge: multiple offers, bidding wars, and homes selling over asking price. While that can be exciting for sellers, it’s creating some stress for buyers - and sometimes, that tension comes to a head at the appraisal.
What’s the issue?
Lenders will use the lower of the two values: purchase price or appraisal. When a home appraises for less than the agreed-upon contract price, lenders will only approve a mortgage based on the appraised value, not the higher purchase price. That can leave buyers scrambling to cover the difference, and sellers questioning whether the deal will fall apart.
Let’s look at an example: A home is listed for $850,000 and receives multiple offers. A buyer wins the bidding war with an $875,000 offer. But when the appraisal comes in, it's only for $860,000. The lender bases the mortgage on $860,000 - not the full $875,000. That leaves a $15,000 appraisal gap that someone needs to cover.
Buyers - How to Handle a Low Appraisal
Here are some strategies buyers are using to keep deals alive in a competitive market:
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Appraisal Gap Coverage: Many buyers are writing appraisal gap clauses into their offers, agreeing upfront to cover a specific amount if the appraisal comes in low. This can give sellers confidence when choosing your offer.
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Bring More Cash to Closing: If you’re financially able, you can choose to increase your down payment to cover the shortfall between the appraised value and the contract price.
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Negotiate with the Seller: Depending on how motivated the seller is and how the rest of the transaction is going, there may be room to negotiate. In some cases, sellers are willing to lower the price or split the gap.
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Challenge the Appraisal: If you and your agent believe the appraisal missed key comps or features, it’s possible to appeal. While not always successful, it can be worth the effort in tight situations.
Sellers - What to Expect and How to Prepare
While it’s exciting to receive offers above your list price, a low appraisal can slow, or even derail the process. Here’s how to stay ahead of it:
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Consider Appraisal Gaps in Your Offer Review: A high offer is only as strong as the buyer’s ability to close. Offers with appraisal gap clauses or larger down payments may be safer bets than the highest number on paper.
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Be Open to Negotiation: If the appraisal comes in low, flexibility can keep the deal together. Depending on how far along you are in your timeline, negotiating the price or meeting the buyer halfway might be the most practical move - especially if you’ll still be receiving more than list price.
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Prepare for the Appraisal: Make sure your home is clean, well-presented, and that your agent provides the appraiser with comparable sales that support the contract price. Highlight upgrades, renovations, and anything that adds value.
In today’s market, a low appraisal doesn’t have to be a dealbreaker - it just requires a plan. Whether you're buying or selling, working with an experienced agent who knows how to navigate these situations can help ensure your transaction stays on track.
