What If the Appraisal Comes In Low?
A low appraisal is primarily a concern for financed transactions, not standard wholesale assignments to cash buyers. However, understanding how appraisals work helps you price deals correctly and anticipate problems when your buyer needs financing.
When appraisals matter in wholesaling
Appraisals are ordered by lenders, not by buyers or sellers. They come into play when:
- Your buyer uses hard money: The lender orders an appraisal to determine how much to lend. If the appraisal comes in lower than the purchase price, the lender reduces the loan amount.
- BRRRR refinance: After rehab, a landlord refinances based on the appraised value. A low appraisal means they cannot pull out as much capital.
- Flip resale: When the flipper sells to a retail buyer with a mortgage, the buyer's lender orders an appraisal. If it comes in below the sale price, the deal may fall apart.
For standard wholesale assignments to cash buyers, appraisals are irrelevant because there is no lender involved. This is another reason why cash buyers are the preferred end buyer for wholesale deals.
How a low appraisal affects your deal
During your wholesale transaction
If your buyer is using hard money and the appraisal comes in low, the lender will only fund based on the appraised value. Your buyer must cover the difference with additional cash or renegotiate the purchase price (which reduces your fee).
On your buyer's flip resale
If you overestimated the ARV and the property appraises low when your buyer tries to sell, the retail buyer's lender will not fund the full amount. The flipper either reduces the sale price (cutting into their profit) or the deal falls through.
This does not directly affect you as the wholesaler since you have already been paid. But it destroys trust. Your buyer will never buy from you again if your ARV was significantly off.
Why appraisals come in low
- Appraiser uses different comps. Appraisers may select comps from a wider area or include less similar properties than you used in your analysis.
- Market has shifted. If the market has softened since your comps sold, current value may be lower than recent sales suggest.
- Appraiser unfamiliar with the neighborhood. An appraiser from outside the area may not understand local pricing dynamics.
- Condition issues. The appraiser may note condition problems that reduce the value below what comp-based analysis suggests.
- Conservative lending environment. In cautious markets, appraisers tend to be more conservative to protect the lender.
What to do when the appraisal is low
For your buyer's purchase
- Request a reconsideration of value. Provide additional comps that the appraiser may have missed. The lender can request the appraiser to review them.
- Buyer covers the gap. If the appraisal is $10K low, the buyer brings an additional $10K in cash to close.
- Renegotiate the price. You may need to reduce your assignment fee to bridge the gap.
- Switch to a cash purchase. If the buyer has the cash, eliminate the lender and appraisal entirely.
- Walk away. If the gap is too large and no one wants to cover it, the deal may not work.
Preventing low appraisals
- Use accurate, recent comps. The same comps that make your deal analysis strong will support the appraisal.
- Prepare a comp package for the appraiser. Your buyer's agent can provide comparable sales to the appraiser. This is legal and standard practice.
- Price conservatively. Using the middle of the comp range rather than the top reduces appraisal risk.
- Sell to cash buyers. No lender, no appraisal, no problem.
The BRRRR appraisal challenge
For buyers using the BRRRR strategy (Buy, Rehab, Rent, Refinance, Repeat), the post-rehab appraisal is critical. They need the property to appraise high enough to refinance out most or all of their invested capital.
If you are selling deals to BRRRR investors, they are particularly sensitive to ARV accuracy. A $20K discrepancy between your projected ARV and the actual appraisal means $20K more of their capital is stuck in the deal. Present realistic ARVs based on solid comps, not optimistic projections.
Bottom line
Low appraisals primarily affect financed transactions. Selling to cash buyers eliminates this risk entirely. When your buyer does need financing, accurate comps and conservative ARV estimates protect against appraisal shortfalls. If a low appraisal does occur, options include reconsideration of value, gap funding, price renegotiation, or switching to a cash transaction.