What Is an Appraisal Gap and Why Does It Happen in Los Angeles?
An appraisal gap occurs when a home’s professionally appraised value comes in lower than the price you agreed to pay for it. Lenders will only finance a loan based on the lower of the two values: the purchase price or the appraised value. The difference between these two numbers is the 'appraisal gap', a shortfall that the buyer is typically responsible for covering in cash.
This scenario is incredibly common in competitive California real estate markets. Imagine you're in a bidding war for a desirable home in Los Angeles. To beat out other offers, you agree to a purchase price of $950,000. However, the licensed appraiser, using recent comparable sales ('comps'), determines the property's fair market value is only $920,000. This creates a $30,000 appraisal gap.
Common Causes of Appraisal Gaps in California
- Intense Bidding Wars: In cities like Los Angeles and San Diego, multiple offers often drive the price well above what recent sales data can support. Buyers make emotional decisions to win the property, but appraisers must use objective, historical data.
- Rapidly Appreciating Markets: When home prices rise quickly, the most recent closed sales might already be outdated. An appraiser may not have enough high-value comps to justify the contract price, even if the market trend supports it.
- Lack of Accurate Comps: For unique properties or in neighborhoods with low inventory, finding three to five truly comparable recent sales can be difficult. The appraiser might have to use comps that are older, farther away, or less similar, resulting in a conservative valuation.
How to Ask the Seller to Lower the Price
Your first and often most effective option is to renegotiate with the seller. A low appraisal gives you significant leverage. The seller is now aware that any future buyer obtaining a mortgage will likely face the same appraisal issue, potentially forcing them to put the house back on the market and start over.
Your real estate agent should handle this communication professionally. The strategy involves:
- Presenting the Evidence: Your agent will formally present the appraisal report to the seller’s agent. This isn't an opinion; it's a data-backed report from a state-licensed professional.
- Making a Formal Request: You can request that the seller reduce the purchase price to match the new, lower appraised value. In our $950,000 offer / $920,000 appraisal example, you would ask them to accept $920,000.
- Offering to Meet in the Middle: If the seller is unwilling to drop the full amount, a compromise is a common solution. You could offer to cover half of the gap ($15,000) if they reduce the price by the other half ($15,000). This shows good faith and can be enough to save the deal for both parties.
Submitting an Appraisal Rebuttal in San Diego
If you and your agent believe the appraisal is genuinely inaccurate, you can challenge it through a process called a 'Reconsideration of Value' (ROV), or an appraisal rebuttal. This is not simply disagreeing with the value; it requires you to provide concrete evidence of errors or omissions.
Step 1: Review the Appraisal Report for Factual Errors
Carefully read the entire report. Look for clear mistakes, as even small ones can impact the final value. Common errors include:
- Incorrect square footage.
- Wrong number of bedrooms or bathrooms.
- Missing major features or upgrades (e.g., a newly remodeled kitchen, a pool, or a finished basement).
- Using photos of the wrong property or outdated exterior shots.
- Listing the property in the wrong school district or neighborhood.
Step 2: Find Better Comparable Sales
This is the most critical part of a successful rebuttal. The appraiser is required to use the best available comps, but in a fast-moving market like San Diego, they may have missed some. Your real estate agent's local market expertise is invaluable here. They should search for properties that are:
- More Recent: Sales that have closed since the appraiser pulled their data.
- More Proximate: Homes located closer to your target property, ideally in the same subdivision.
- More Similar: Properties that more closely match yours in size, age, condition, and features.
For instance, if the appraiser used a comp from a less desirable neighborhood a mile away, but your agent finds three sales on the same street that closed for higher prices in the last 30 days, you have a strong case for a value adjustment.
Step 3: Draft and Submit the Rebuttal
Your mortgage lender must submit the ROV on your behalf. You and your agent will compile all the evidence into a formal package. This typically includes a letter detailing the factual errors and a list of the new, more appropriate comparable sales with justification for why they should be considered. The original appraiser will review the new information and decide whether to revise the value. Success is not guaranteed, but it is a worthwhile step if you have compelling evidence.
Can My Lender Help Cover the Shortfall?
A common misconception is that a lender can simply provide a credit to cover the appraisal gap. Lenders do not give away money to cover a valuation shortfall. However, there are indirect ways your financing structure can help free up cash.
One option is a lender credit. This is not free money; it's a trade-off where you agree to a slightly higher interest rate on your mortgage. In exchange, the lender covers some or all of your closing costs. For example, if your closing costs were estimated at $12,000, a lender credit could cover that amount, freeing up $12,000 of your cash that you could then apply toward the appraisal gap. This increases your monthly payment but can be a crucial tool for saving a transaction when you're short on liquid funds. (The data, information, or policy mentioned here may vary over time.)
Is Getting a Second Appraisal an Option?
Getting a second appraisal is not as simple as just ordering another one. Lenders that use conventional loans (backed by Fannie Mae and Freddie Mac) are prohibited from 'appraiser shopping'. They cannot order a second appraisal simply because the borrower didn't like the value of the first one.
The primary way to get a new appraisal is to change lenders entirely. This effectively resets the mortgage application process. A new lender will order a new appraisal from a different appraiser. However, this path has significant risks:
- Delays: Switching lenders can add several weeks to your closing timeline, potentially putting you in breach of your purchase contract.
- Cost: You will have to pay for the second appraisal out of pocket, with no guarantee the value will be higher.
- Rate Lock Risk: You may lose the interest rate you had locked with your original lender.
This option should only be considered if you have strong reason to believe the first appraisal was deeply flawed and your contract allows for the necessary time extension.
How a Low Appraisal Affects Your Loan and Down Payment
Understanding the math is critical. The lender's loan-to-value (LTV) calculation is always based on the lower of the purchase price or appraised value.
Let's use a clear example for a home purchase in Long Beach, California:
- Purchase Price: $800,000
- Your Planned Down Payment (20%): $160,000
- Initial Loan Amount: $640,000
Now, the appraisal comes in low:
- Appraised Value: $770,000
- Appraisal Gap: $30,000
The lender will now only lend you 80% of the $770,000 appraised value.
- New Maximum Loan Amount: 80% of $770,000 = $616,000
- Your New Cash-to-Close Requirement:
- The total cash you must provide at closing is the difference between the purchase price and the new loan amount: $800,000 - $616,000 = $184,000.
- This new cash requirement of $184,000 covers your down payment on the appraised value plus the entire $30,000 appraisal gap.
What Are the Risks of Cancelling the Contract?
Your ability to walk away from the deal depends entirely on your purchase contract's contingencies. The most important one in this situation is the appraisal contingency.
If your offer included an appraisal contingency, you have the right to cancel the contract and have your earnest money deposit returned if the home doesn't appraise for the purchase price. This is your protected exit.
However, to make their offers more competitive in markets like Los Angeles, many buyers are advised to waive some or all contingencies. If you waived your appraisal contingency, you are contractually obligated to move forward with the purchase and cover any appraisal gap. Backing out at this stage would mean forfeiting your earnest money deposit, which is typically 1-3% of the purchase price, a loss of $8,000 to $24,000 on an $800,000 home. (The data, information, or policy mentioned here may vary over time.) If you're facing an appraisal gap in California, navigating the next steps can be complex. A knowledgeable mortgage advisor can review your report, explain your lender's specific policies, and strategize the best path forward to save your deal.
If an appraisal gap is complicating your California home purchase, understanding all your options is the first step toward a solution. Ready to see how a seasoned advisor can help secure your financing and save your deal? Apply for your mortgage today.
Author Bio
David Ghazaryan is the expert mortgage strategist and founder behind iQRATE Mortgages. With a mission to fund home loans that traditional banks won't touch, David specializes in helping clients with unique financial situations, including those recovering from foreclosure or bankruptcy. He expertly crafts smart, strategic, and stress-free mortgages by leveraging a vast network of over 100 lenders to secure competitive rates for investors and homebuyers alike. Praised for exceptional customer service, David has helped hundreds of families with a 97% satisfaction rate, guiding them to the mortgage they deserve.
References
CFPB - What is a home appraisal, and what is its purpose?
