The appraisal comes back. The number is lower than the contract price. Now what?

A low appraisal does not automatically end the deal. It opens a negotiation. But the options available to you as a Texas seller depend on three things: the type of loan the buyer is using, which addenda are attached to the contract, and how motivated both parties are to make the deal work. Understanding all three gives you the leverage to navigate the situation without losing the sale or giving away more than you should.

This guide covers what an appraisal gap actually is, the four options sellers have, how each loan type changes the rules, the TREC contract provisions that govern appraisal contingencies, and how to challenge a low appraisal through a reconsideration of value.

In this article:

What is an appraisal gap?

An appraisal gap occurs when the buyer's lender orders an independent appraisal of the property and the appraised value comes in below the agreed purchase price in the contract. The lender will only finance up to the appraised value. The difference between the appraised value and the contract price is the gap.

For example, if you agreed to sell your San Antonio home for $340,000 and the appraisal comes in at $325,000, the gap is $15,000. The lender will not lend more than $325,000 (or the appropriate loan-to-value percentage of $325,000). The $15,000 difference must be resolved before closing can proceed.

This is not a rare event. In shifting markets, in areas with limited comparable sales, or in neighborhoods where sale prices have moved faster than the data appraisers use, low appraisals happen regularly. A well-priced home in a stable market with strong recent comps rarely has appraisal problems. A home priced above recent comparable sales in a softening market is at higher risk.

Why appraisals come in low

Understanding why the appraisal came in low helps you decide whether to challenge it and how to negotiate.

The appraiser used different comps than your pricing analysis. You and your buyer agreed on a price based on one set of comparable sales. The appraiser may have used different comps, weighted different factors, or excluded sales you considered relevant. Appraisers are required to use the most recent comparable sales within the closest proximity to the subject property, but there is inherent judgment in selecting and adjusting comps.

The market shifted between contract and appraisal. If home values in your area declined between when you went under contract and when the appraisal was ordered, the most recent closed sales may not support the contract price even though they supported it when the offer was accepted.

The home has unique features the comps do not reflect. A renovated kitchen, a pool, a larger lot, or a view may add value in the market that comparable sales data does not capture if the comps lack those same features. Appraisers make adjustments for differences, but adjustments are estimates and appraisers tend to be conservative.

Limited comp availability. In rural areas, in neighborhoods with few recent sales, or for unique property types, the appraiser may not have enough comparable data to support the contract price. Fewer comps mean less certainty, and appraisers default to caution.

The appraiser is unfamiliar with the neighborhood. Appraisers are assigned by appraisal management companies and may not be experts in your specific market area. An appraiser from a different part of the metro area may not understand the premium that a particular school district or neighborhood commands.

Your four options as a seller

When the appraisal comes in low, the deal does not die. It enters a negotiation. You have four paths forward, and the right choice depends on your specific situation.

Option 1: Lower the price to the appraised value

You reduce the contract price to match the appraised value. The buyer's financing proceeds as originally planned. You absorb the entire gap.

When this makes sense: when you are under time pressure to close, when you believe the appraisal is accurate and the home was overpriced, when you have already purchased your next home and cannot afford the deal to fall apart, or when the gap is small enough that absorbing it is less painful than starting over with a new buyer.

When this does not make sense: when the gap is large, when you have backup offers, when the market is strong and another buyer is likely to appear quickly, or when you believe the appraisal used inappropriate comps and a challenge could succeed.

Option 2: The buyer covers the gap in cash

The buyer pays the difference between the appraised value and the contract price out of pocket, in cash, on top of their down payment. The contract price stays the same. The lender finances up to the appraised value. The buyer brings extra cash to closing to cover the gap.

When this makes sense: when the buyer is highly motivated, has available cash, and does not want to lose the home. Some buyers in competitive situations include "appraisal gap coverage" in their original offer, committing upfront to cover a gap up to a specified amount.

When this does not make sense: when the buyer is already stretching to make the down payment, when the buyer is using a low-down-payment loan (FHA with 3.5% down, for example), or when the gap is so large that covering it in cash is not realistic for the buyer. You cannot force the buyer to cover the gap. They must agree to it.

Option 3: Split the gap

You lower the price by some amount, and the buyer brings additional cash to cover the rest. This is a compromise that keeps the deal alive when neither party wants to absorb the entire gap alone.

For example, on a $15,000 gap, you might lower the price by $8,000 and the buyer brings $7,000 in additional cash. The exact split is negotiated. There is no standard formula. It depends on market conditions, leverage, motivation, and the specific dynamics of the deal.

When this makes sense: in most cases. This is the most common outcome when a low appraisal occurs in Texas. Both parties share the impact, both parties stay motivated to close, and the deal survives.

Option 4: Terminate the contract

If neither party is willing to bridge the gap, the contract terminates. Whether the buyer gets their earnest money back depends on the loan type and the addenda in the contract. This is where the details of your specific contract matter enormously, and where the distinction between conventional, FHA, and VA financing becomes critical.

How the loan type changes everything

This is the section most articles about low appraisals get wrong or skip entirely. The buyer's loan type fundamentally changes the rules for what happens when the appraisal comes in low. The TREC contract handles appraisal contingencies differently depending on whether the buyer is using conventional, FHA, or VA financing.

Conventional financing

For conventional loans, the appraisal situation is handled through two separate contract provisions, and the distinction between them matters.

Paragraph 2B of the Third Party Financing Addendum (Property Approval): This paragraph gives the buyer the right to terminate if the property does not meet the lender's underwriting requirements. A low appraisal can trigger this provision, but only if the lender provides a written statement that the low appraisal specifically caused the property to fail underwriting. This is an indirect protection. The buyer cannot simply point to a low appraisal number and terminate. They need documentation from the lender connecting the low appraisal to a financing denial.

TREC Form 49-1 (Addendum Concerning Right to Terminate Due to Lender's Appraisal): This addendum provides more direct, explicit protection tied specifically to the appraisal value. It is used only with conventional financing, not with FHA or VA loans. When this addendum is attached to the contract, the buyer's appraisal-related termination rights are defined by its three options. See the next section for a full breakdown.

If neither Paragraph 2B nor TREC 49-1 provides a termination path, and the buyer cannot obtain financing because of the low appraisal, the situation becomes a contract dispute that may need to be resolved through mediation.

FHA financing

FHA loans carry their own appraisal protections that are separate from and more powerful than the conventional provisions. Paragraph 4B of the Third Party Financing Addendum states that for FHA financing, the appraised valuation determines the maximum mortgage HUD will insure. HUD does not warrant the value or the condition of the property.

In practical terms, if the FHA appraisal comes in at $325,000 on a $340,000 contract, the FHA lender will only insure a mortgage based on $325,000. The buyer must either cover the $15,000 gap in cash (from non-borrowed funds) or terminate the contract. The buyer has a clear right to terminate under the financing addendum if the property does not meet FHA underwriting requirements.

FHA appraisals also carry specific property condition requirements beyond just value. The home must meet HUD minimum property standards. If the appraiser notes deficiencies like peeling paint, broken windows, missing handrails, or safety hazards, those must be corrected before the FHA loan can close. This can create additional negotiation around repairs separate from the value question.

VA financing

VA loans have the strongest appraisal protections for the buyer and the most significant implications for the seller. Paragraph 4C of the Third Party Financing Addendum governs VA appraisals.

If the VA appraisal comes in below the contract price, the buyer can terminate the contract and receive their earnest money back. The buyer may choose to pay the difference in cash, but the VA will not finance above the appraised value, and those additional funds cannot come from borrowed sources unless specifically approved by the VA. The buyer must disclose to the VA the source of any cash used to cover the gap.

VA appraisals carry two additional considerations sellers should understand:

The Tidewater process: Before a VA appraiser finalizes a value below the contract price, they may invoke the Tidewater initiative, which gives the buyer's agent or lender an opportunity to submit additional comparable sales data before the final value is determined. This is essentially a built-in reconsideration step that happens before the low value is official.

The appraisal stays with the property: A VA appraisal can remain attached to the property's address for up to six months. If the deal falls through and you relist, the next VA buyer may be subject to the same low appraised value. This means a low VA appraisal does not just affect the current transaction. It can affect future VA offers on your home within that window.

Cash buyers

Cash buyers have no lender, no required appraisal, and no appraisal contingency unless they specifically add one to the contract. If a cash buyer orders an independent appraisal for their own information and it comes in low, it does not create a contractual right to terminate. The deal proceeds at the contract price unless the buyer has negotiated a separate appraisal contingency. This is one of the reasons cash offers are attractive to sellers: they eliminate appraisal risk entirely.

The appraisal addendum (TREC 49-1) explained

TREC Form 49-1, the Addendum Concerning Right to Terminate Due to Lender's Appraisal, is a contract addendum used exclusively with conventional financing. It is not used with FHA or VA loans because those loan types have their own appraisal provisions in the Third Party Financing Addendum.

This addendum has three options. Only one is selected per contract. Understanding which option your buyer chose tells you exactly how much leverage you have when the appraisal comes in low.

Option 1: Waiver

The buyer waives the right to terminate based on the appraisal. Regardless of what the appraisal says, the buyer cannot use the appraisal value as grounds to terminate the contract. The buyer is telling you they will proceed with the purchase at the contract price no matter what the appraisal says.

This is the strongest possible position for the seller. If the appraisal comes in low with a Waiver in place, the buyer must find a way to cover the gap. If they cannot, they are in breach of contract and you may be entitled to the earnest money.

Option 2: Partial waiver

The buyer agrees to pay up to a specified dollar amount above the appraised value. For example, the buyer might commit to covering the first $10,000 of any appraisal gap. If the gap is $10,000 or less, the buyer covers it in cash and the deal closes. If the gap exceeds $10,000, the buyer can terminate for the amount above their commitment.

This option is increasingly common in competitive markets. It signals a serious buyer while still providing some protection if the appraisal is dramatically low.

Option 3: Additional right to terminate

The buyer gains an explicit right to terminate if the appraisal comes in below a specified amount. For example, the buyer might specify that they can terminate if the appraisal is below $330,000. If it appraises at $330,000 or above, the buyer cannot terminate based on the appraisal. If it appraises below $330,000, they can walk away and get their earnest money back.

This option gives the buyer more protection than the standard Third Party Financing Addendum provisions and is more direct than relying on the lender's underwriting determination under Paragraph 2B.

What if TREC 49-1 is not in the contract?

If the buyer did not include TREC 49-1 and is using conventional financing, their appraisal-related termination rights fall back to Paragraph 2B of the Third Party Financing Addendum. As noted above, this requires the lender to provide a written statement that the low appraisal caused the property to fail underwriting. It is a narrower protection than TREC 49-1 provides.

How to challenge a low appraisal

A low appraisal is not final. Sellers can push back through a reconsideration of value (ROV) process. This is not a complaint or an appeal. It is a formal submission of additional comparable sales data to the appraiser through the buyer's lender.

How the ROV process works

You or your broker prepare a list of comparable sales that the appraiser did not use or that have closed since the appraiser pulled their data. The list should include the address, sale price, sale date, square footage, and any relevant features that make each comp comparable to your property. The more specific and relevant the comps, the stronger the case.

The data is submitted to the buyer's lender, not directly to the appraiser. The lender forwards it to the appraiser with a request to review and consider the additional data. The appraiser then decides whether the new data warrants a revision to the appraised value. There is no guarantee the appraiser will change the value, but ROV requests supported by strong comparable sales data succeed regularly.

What makes a strong ROV submission

The most effective ROV submissions include comparable sales that are closer in proximity to the subject property than the comps the appraiser used, sales that closed more recently, sales with similar features that the appraiser's comps lacked (same school district, same lot size, similar upgrades), and a clear explanation of why each comp is more appropriate than the ones used in the original appraisal.

A weak ROV submission includes active listings (not closed sales), properties that are not comparable in size, condition, or location, or subjective arguments about why the home is "worth more" without data to support the claim. Appraisers respond to data, not opinions.

What usually happens in practice

In most Texas transactions where the appraisal comes in low, the deal does not die. The most common outcome is a negotiated resolution, typically a split of the gap. The seller lowers the price by some amount, the buyer brings additional cash, and both parties close.

The negotiation dynamics depend heavily on market conditions. In a seller's market with multiple offers, the seller has leverage and the buyer is more likely to cover the gap or accept a smaller price reduction. In a buyer's market where homes sit longer, the seller has less leverage and may need to absorb more of the gap to keep the deal alive.

The buyer's motivation matters too. A buyer who has already sold their current home, has kids enrolled in the school district, or has been searching for months is more likely to cover the gap than a buyer who is casually shopping. Understanding the buyer's situation helps you calibrate your response.

Seller strategy when the appraisal is low

Step 1: Read the contract addenda

Before responding to anything, check which appraisal-related addenda are in the contract. Is TREC 49-1 attached? If so, which option did the buyer select? Is the buyer using FHA or VA financing? The answers determine what the buyer can and cannot do contractually.

Step 2: Review the appraisal report

Request a copy of the appraisal report through the buyer or the buyer's agent. Review the comps the appraiser used. Look for errors: wrong square footage, incorrect room count, missing upgrades, comps that are not truly comparable in location or condition. Any factual error is grounds for an ROV.

Step 3: Prepare your ROV data

If you believe the appraisal used inappropriate comps or missed relevant sales, prepare a reconsideration of value submission with better comparable data. Submit it quickly. The longer the low appraisal sits, the harder it is to challenge.

Step 4: Negotiate from a position of knowledge

Know your alternatives before you respond. Do you have backup offers? How long was the home on market before this offer? What will relisting cost you in time and carrying costs? If your alternatives are weak, splitting the gap and closing may be the best financial decision even if the appraisal feels unfair. If your alternatives are strong, you have leverage to hold firm.

Step 5: Respond in writing

Any agreement to change the contract price must be documented through a formal TREC Amendment. Verbal agreements to lower the price are not enforceable. Sign nothing until you have reviewed the amendment terms and understand the net impact on your proceeds.

How to reduce the risk of a low appraisal before it happens

The best appraisal strategy is pricing correctly from the start. A home priced at or near the comparable sales data will almost always appraise. A home priced significantly above recent comps is at risk regardless of how special the property is.

Price using sold data, not active listings. (See our guide on how to price your home without a listing agent.) Appraisers use closed sales, not asking prices. If your pricing analysis relied on what other sellers are asking rather than what buyers are actually paying, you are building on a foundation that the appraiser will not use.

Prepare a comp package for the appraiser. Before the appraisal appointment, prepare a one-page summary of the most favorable recent comparable sales in your area. Include the address, sale price, sale date, square footage, and a note about any improvements you have made to the property. Leave this package at the home for the appraiser to review during their visit. You cannot influence the appraisal, but you can provide data the appraiser might not have found on their own.

Make the property accessible and presentable. The appraiser's visit is not a showing, but the condition of the property does affect the appraisal. Clean, well-maintained properties appraise better than cluttered, deferred-maintenance properties because the appraiser assesses the overall condition as part of their analysis.

Know the buyer's loan type before accepting the offer. VA and FHA offers carry higher appraisal risk than conventional offers because the appraisal protections for the buyer are stronger and the appraisal can stay attached to the property. If you have multiple offers at similar prices, the loan type is a factor worth considering.

Frequently asked questions

How often do appraisals come in low in Texas?

There is no published statewide rate, but industry estimates suggest that approximately 8% to 12% of appraisals come in below the contract price in any given quarter. The rate is higher in rapidly appreciating markets where sale prices are outpacing the comparable data, and lower in stable markets where pricing is well-supported by recent sales.

Can I order my own appraisal before listing?

You can order a pre-listing appraisal for your own information, but the buyer's lender will still order their own independent appraisal. Your pre-listing appraisal has no influence on the lender's appraisal. It can, however, help you price accurately from the start and provide data for an ROV submission if the lender's appraisal comes in lower than your pre-listing value.

What is appraisal gap coverage?

Appraisal gap coverage is a commitment by the buyer, typically written into the contract or specified in TREC 49-1, to cover the difference between the appraised value and the contract price up to a specified amount. For example, a buyer might include "$10,000 appraisal gap coverage" in their offer, meaning they will pay up to $10,000 above the appraised value in cash. This makes the offer more attractive to sellers because it reduces appraisal risk.

Does a low appraisal mean my home is overpriced?

Not necessarily. Appraisals are opinions of value based on comparable sales data, and two appraisers can reach different conclusions on the same property. A low appraisal may reflect limited comp availability, an appraiser unfamiliar with the neighborhood, or a rapidly moving market where the most recent closed sales have not yet caught up to current contract prices. It may also accurately reflect that the home was priced above what the data supports. Review the comps used and compare them to your own pricing analysis before concluding that the appraisal is wrong.

How does Waymark help when the appraisal comes in low?

On the Manage plan, Waymark's licensed broker reviews the appraisal report, evaluates the comps used, prepares a reconsideration of value submission with stronger comparable data if warranted, and advises on whether to negotiate, split the gap, or hold firm based on your specific contract terms and market position. On the Launch plan, Aria walks you through each of your four options with specific dollar amounts showing the net proceeds impact of each choice so you can make an informed decision. Aria also auto-generates an appraisal comp report seven days before the buyer's appraisal deadline, giving you a head start on the ROV data before the appraisal even happens. All of this is included in Waymark's pricing starting at $699 with no listing commission at closing.

Selling your Texas home? An agent costs you 3%. FSBO costs you protection. Waymark gives you both for $699. Start your listing at waymarkre.com.

Related articles