It arrives as a phone call in the third week and it lands like a failure. The appraisal came in low. Both sides hear it as somebody being told they were wrong, which is why the conversation that follows is usually worse than it needs to be. It is not a judgment. It is an arithmetic problem with four known solutions.
The short answer
The lender will lend against the appraised value, not against the contract price. If the appraisal is below the offer, the difference has to come from somewhere: the buyer's cash, a lower price, a split, or the deal ends. Nothing else is available.
Who the appraisal is actually for
It is not for the buyer and it is not for the seller. It is ordered by the lender to protect the lender, because the house is the collateral and the lender would like to know what the collateral is worth before handing over the money. That is worth knowing, because it explains why an appraiser is not interested in what the house means to anybody.
It is also a different exercise from the two other numbers that get quoted at you. What separates an appraisal from a market analysis from an online estimate is in its own note.
Why it happens
- The house sold in a bidding situation and the comparable sales have not caught up to it yet
- It is unusual for the street, and unusual is the hardest thing to find comparables for
- Recent work was done without permits, so it does not count the way the owner thinks it counts
- The appraiser used sales from a stretch of the market that is not really the same market
The four ways out
The buyer brings the difference in cash. The loan is based on the appraised value, so the buyer covers the gap on top of the down payment. This is the most common resolution and it is only available to a buyer who has the money sitting there.
The seller lowers the price to the appraised value. Worth taking more seriously than it usually is. The next buyer's lender will very likely order an appraisal that lands in the same place, so a seller who refuses today is often negotiating with the same number again in six weeks, having lost the time.
The two sides split it. Ordinary, unglamorous, and it closes most of the ones that close.
The buyer walks. Whether the earnest money goes with them depends entirely on what the contract says about financing and appraisal, which is why that paragraph is worth reading before it matters rather than after.
What an appraisal gap clause actually commits you to
In a competitive offer a buyer may agree in advance to cover a shortfall up to a stated amount. It makes the offer stronger because it moves the risk off the seller. It is also a real promise of real money, and a buyer who writes one should be able to say out loud where that money is coming from. If the honest answer is that it will not be there, the clause is not a negotiating tactic, it is a problem scheduled for three weeks out.
If you are the seller
Find out whether the appraiser had the information that supports the price, because often they did not. A floor plan with measured square footage, the list of what was replaced and when, and the sales you would have used are all things that can be provided. A challenge is not a negotiation and it does not usually succeed, but it succeeds often enough to be worth one attempt when there is a real factual gap to point at.
The uncomfortable part
An appraisal that comes in under the offer is frequently the market saying something the seller has been told already. Most agents are paid only when the answer is move. I will tell you when it is not, and I will tell you when the second number is closer to right than the first one was.
The part I will not answer
Whether the loan survives the change, and what covering a gap does to your qualifying, belongs to your lender. What your contract lets you do, and what happens to the earnest money, belongs to an attorney. What any of it does to your taxes belongs to your CPA. I will tell you which one to call, and I am not going to answer any of it myself.
If you are weighing the sale and the purchase against each other, the note on selling first or buying first is the other half of this, and the buyers page covers the order things happen in.
This note is general. It is not lending, tax or legal advice, and what applies to your transaction depends on your contract and on terms only your lender and your attorney can give you.