Does a low appraisal actually kill a deal or is there always a way through it

Question

I am watching a duplex in Garfield Heights that is listed at $189,000 and I have been running numbers on it for about six weeks. My concern is not whether I can get to the down payment, I am close enough that this is a real question now. My concern is what happens if the appraisal comes in at say $170,000 or $175,000 and the seller does not want to move.

From what I can piece together, the lender will only lend against the appraised value, so a $189k purchase price with a $170k appraisal means I am either covering the $19k gap out of pocket on top of my down payment, or I am renegotiating with the seller, or the deal falls apart. On a duplex in that price range that $19k gap is not small, especially when I am already stretching to get to 20 percent down on the purchase price.

What I do not know is how often sellers actually renegotiate when this happens. Is there a standard expectation that the seller drops to appraised value, or do a lot of them just refuse and wait for a cash buyer? Also if I were to go FHA instead of conventional, does the low appraisal outcome work any differently, because I have read something about FHA appraisals sticking to the property for a period of time but I do not fully understand what that means in practice.

And the last part I genuinely cannot figure out: if I negotiate the price down to $170k after a low appraisal, does the new price reset what the appraiser already filed, or does the lender just use the original report?

Rena Guide · Answer

Your read on the mechanics is correct. The lender bases the loan on the lower of the purchase price or the appraised value, so a $170,000 appraisal against a $189,000 contract means you are financing against $170,000. The $19,000 gap has to come from somewhere: you pay it in cash on top of your down payment, the seller drops the price, or you walk away if your contract has an appraisal contingency. An appraisal contingency is a clause written into the purchase contract that lets you cancel without losing your deposit if the appraisal comes in below the agreed price. Whether your contract has one matters a lot here, so check that first.

How often sellers renegotiate depends on the market and the seller's position. In a slow or neutral market, sellers renegotiate fairly often because losing the buyer means starting over. In a competitive market, some sellers hold firm and wait for a cash buyer who does not need a lender at all. There is no standard expectation either way.

On FHA: you have the right thread. FHA appraisals include a property condition review and, once completed, attach to the property's address for 120 days. That means if your deal falls apart and another FHA buyer comes along within that window, the lender will likely use the existing report at the same value. That can make the property harder for the seller to move to another FHA buyer, which sometimes gives you a small negotiating angle. It also means an FHA appraisal that comes in low creates a stickier problem for the seller than a conventional one does.

On your last question: if you renegotiate the price to $170,000, the lender uses the appraisal report already on file. The report does not reset because the price changed. The lender takes the lower of the new contract price and the appraised value, and in this case they would be the same.

One thing worth confirming with your lender before you go under contract: ask them exactly how they handle the appraisal gap on a duplex, because some loan products have conditions that differ from single-family financing.

What does your current contract template say about an appraisal contingency?

Does a low appraisal actually kill a deal or is there always a way through it

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