In a Texas real estate transaction involving third party financing, ie. a loan, lender approval is required for the deal to close. That approval is broken down into two parts. The buyer must obtain approval for the loan based on their finances, credit, income etc. and the property must also be approved. Physical conditions within the home may cause the property to become ineligible for funding, or the home may not appraise at the value agreed upon in the contract. For the purpose of this post, I am focusing on the latter: what happens when a home doesn’t appraise.
If an appraisal comes in at a lower value than the agreed upon contract price, there are a few options for how the parties to the contract can handle this scenario. In order to illustrate these scenarios, let’s say that the Johnsons are selling their home to the Smiths. They have agreed to a purchase price of $360,000; however, the home only appraised for $340,000. The first option is that the sellers and buyers can agree to drop the contract sales price to the appraised value. However, the Johnsons may not want to just drop the price to $340,000. After all, they accepted the Smiths offer in a multiple offer situation, and they turned down a $350,000 cash offer. So, let’s say the Johnsons do not agree to reduce the sales price to $340,000. This brings us to scenario number two; the Johnsons propose that the Smiths bring $20,000 cash to the table in order to close the deal at the agreed upon $360,000 sales price. If the Smiths are capable of coming up with an additional $20,000 cash to put down on the property, this solution could work. However, the Smiths are not obligated to agree to this scenario even if they are financially capable of it. Let’s say the Smiths only have an additional $10,000 they could put towards the home. The Smiths could propose that they put an additional $10,000 down, and that the sales price is reduced to $350,000. If the Johnsons approve, this scenario would also allow for the transaction to close. If the Smiths and the Johnsons cannot come to an agreement, the deal will fall through and the earnest money will be returned to the Smiths. The third party financing addendum used in Texas real estate transactions is very clear on this. However, there is one other option for the Johnsons and Smiths in this situation. They could appeal the initial appraisal, or request a new appraisal. It would be prudent for the Johnsons to make sure that the Smiths would still pay the agreed upon contract price of $360,000 if a new appraisal deems the property to be worth that amount. Many buyers are inclined to not pay more than the appraisal amount, and in Texas, they are protected from doing so unless they want to bring the extra cash to the table.
17 Comments
6/28/2018 01:33:47 pm
I really like how you talk about appraisals and what to do if your home comes in at a lower value. This is something that my wife and I have been concerned with because we have been wanting to get an idea of how much our home costs. Maybe we should look into hiring an appraiser and get a professional opinion.
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Erika Rae Albert
6/28/2018 01:54:48 pm
Hi Burt,
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Mary Hart
3/11/2021 08:35:53 am
I thought in this situation, you could only get your earnest money back if you have "appraisal contingency" written in your contract. 7/1/2018 01:27:15 am
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7/29/2019 12:47:05 pm
It's good to know that you have options if your appraisal comes in at a lower price than the agreed-upon contract. My wife and I want to sell our house, and we don't know how much it's worth. We'll be sure to have an appraisal done to help us figure that out.
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Erika Albert
7/29/2019 02:14:59 pm
Hi Thomas,
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3/11/2021 08:52:43 am
Mary Hart,
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Michelle Williams
4/5/2021 07:02:14 pm
If a property was previously under contract and appraisal was low - can a realtor disclose how much the appraisal was.
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Erika Rae Albert
4/7/2021 08:33:23 am
Technically, that appraisal belongs to the buyer who backed out. REALTORS have a fiduciary obligation to their clients. It depends on which REALTOR you are referring to and what the client (buyer or seller) wants to do.
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Michelle Williams
4/7/2021 08:44:57 am
I represented the seller..the appraisal was from buyers lender and we felt it was low. I was wondering if I should disclose the amount of previous appraisal when negotiating new offers. In case we run into the same problem. I sold 2 other condos in same building that were cash and appraiser dont really consider them.
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3/29/2022 10:29:29 pm
it's great that you elaborated on If an appraisal comes in lower than the agreed-upon contract price, the parties to the contract have a few alternatives for dealing with the situation. A distant relative of ours is planning to sell his commercial property but doesn't know yet how much should he sell it. I will advise him to consult a commercial real estate appraisal service to know the real value of his property.
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Tina Watson
4/21/2022 03:18:39 pm
I'm currently in contract buying a house under the financing contingency. I have a larger down payment like at 25% of purchase price. My question is if the appraisal comes in lower than purchase price can I negotiate with seller or back out and still get my earnest money? I'm positive the appraisal will be more than the loan amount and i be approved. But i dont want to pay more than appraisal and i dont want to lose earnest money. My fear is with the amount of my downpayment, financing will be approved and I will not be able to back out if appraisal is lower. I do not have the appraisal contingency. Is my fear true?
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4/21/2022 04:09:58 pm
Hi Tima,
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4/17/2023 06:37:58 am
Thank you for your informative blog post on real estate appraisals.
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11/30/2023 06:26:46 am
The discussion on what happens if a home doesn't appraise in a Texas real estate transaction is highly informative. Understanding the potential challenges and exploring solutions is crucial for both buyers and sellers. This article contributes to a deeper comprehension of the appraisal process in the Texas real estate market, empowering individuals to navigate transactions more effectively.
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2/12/2025 02:40:20 am
It’s great that you highlighted the option to appeal the appraisal. That could be a good strategy if the Johnsons feel the initial appraisal doesn’t reflect the true value of the property. But as you pointed out, it’s important for the Johnsons to clarify with the Smiths whether they’re still willing to stick with the $360,000 price if the new appraisal comes back with the same or similar value. Buyers don’t always want to go above the appraisal, especially in today’s market where many are more cautious with their budgets.
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Erika Rae Albert
2/12/2025 08:23:06 am
Very true Diana! I wrote this in 2017 so things were certainly different then!
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