When a home appraises below the contract price, someone has to cover the difference. The standard forms offer three answers - and sometimes none of them is the right one.
Where the gap comes from
A lender will only lend against appraised value, not against what you agreed to pay. If a home is under contract at $1.5M and appraises at $1.45M, the lender bases financing on the lower figure and a $50,000 gap opens between the two.
In a fast-moving market, gaps are common - appraisers look backwards at closed sales while buyers compete on today’s prices.
The three standard outcomes
The TREC promulgated forms contemplate a limited set of scenarios: the buyer covers the shortfall in cash, the parties renegotiate, or the buyer terminates under the appraisal provision and recovers earnest money.
Most transactions fit one of those. The difficulty arrives when what both sides actually want sits between them.
- Buyer brings additional cash to close the gap
- Parties renegotiate the price, or split the difference
- Buyer terminates under the appraisal provision
When the forms do not fit
We have had buyers who were comfortable paying a specific amount above appraised value - say $10,000 - but no more. That is a reasonable position and the standard forms simply do not express it.
The answer is attorney-drafted language that states the arrangement plainly: what the buyer commits to, what minimum proceeds the seller is guaranteed, and exactly how the appraisal affects the final numbers.
This is where a contract-literate agent earns their keep. Most transactions never need custom language; the ones that do would otherwise fall apart.
How to reduce the risk before you are in it
Sellers can order a pre-listing appraisal or at minimum price against genuinely comparable closed sales. Buyers can ask, before offering, how the seller intends to handle a shortfall - the answer tells you a great deal about how the rest of the deal will go.
