A buyer I was working with in Eagan called me on a Thursday morning with a tone in her voice that fell somewhere between confused and frustrated.
She had been under contract on a home for about three weeks. Everything had gone well. The inspection was clean. Her financing was moving along. And then her lender called to tell her the appraisal had come in at twenty-two thousand dollars below the purchase price.
“Lesley, I don’t even fully understand what an appraisal is. I thought it was just a formality. How is this suddenly such a big problem?”
She is not alone in that assumption. The appraisal is one of the most misunderstood steps in the homebuying process, in part because buyers hear about it but rarely have reason to think carefully about it until something goes wrong. When everything is fine, the appraisal is a document that appears in your file and gets reviewed by your lender without causing any disruption. When it comes in below the purchase price, it suddenly becomes the most important piece of paper in the entire transaction.
Understanding what an appraisal is, how it works, what appraisers actually evaluate, and what happens when the number comes in where you did not expect it, is knowledge that serves every buyer regardless of whether their specific appraisal produces a complication.
Here is everything you need to know about home appraisals in Minnesota.
What a Home Appraisal Is
A home appraisal is a professional, independent assessment of a property’s market value, conducted by a licensed or certified appraiser who is qualified to provide an objective opinion of value that meets the standards required by mortgage lenders.
When you obtain a mortgage to purchase a home, your lender has a fundamental interest in the value of the property you are buying because that property is the collateral for your loan. If you were to default on the loan, the lender would need to sell the property to recover what it is owed. A lender that lends more than a property is worth has extended credit beyond what the collateral can support, which is a risk the lender is not willing to accept.
The appraisal is the mechanism through which the lender obtains an independent, professional opinion of the property’s value before committing to the loan. The lender does not simply take your purchase price as evidence of value. They require a separate, objective evaluation by a credentialed professional who has no financial stake in the outcome of the transaction.
The appraiser’s job is to determine what the property would sell for in an arm’s length transaction between a willing buyer and a willing seller in the current market. That determination is grounded in a specific methodology, not in opinion or impression.
Who Orders and Who Pays for the Appraisal
The appraisal is ordered by your lender, not by you directly. Your lender selects the appraiser through a process that is designed to ensure the appraiser’s independence from both the lender’s loan production team and from the buyer and seller in the transaction.
Federal regulations that emerged from the 2008 financial crisis established strict independence requirements for residential real estate appraisals used in mortgage lending. Lenders are generally required to use an Appraisal Management Company that selects the appraiser from a panel of qualified appraisers, rather than allowing loan officers or other parties with an interest in the transaction’s completion to select the appraiser directly.
You, the buyer, pay for the appraisal. The cost is typically between four hundred fifty and six hundred fifty dollars for most single-family residential properties in the Twin Cities metro, though it can be higher for larger properties, unusual property types, or rural locations where comparable sales data is more difficult to find.
The appraisal fee is typically paid when the appraisal is ordered, not at closing, which means it is one of the early upfront costs of the homebuying process rather than a closing day expense.
What the Appraiser Actually Evaluates
The appraisal process involves two distinct components that together produce the appraiser’s opinion of value.
The first component is the physical inspection of the property. The appraiser visits the property in person and evaluates its condition, size, layout, features, and overall characteristics. They note the property’s square footage, the number of bedrooms and bathrooms, the age and condition of major systems, the quality of construction and finishes, the size and usability of the lot, the presence of a garage, and any other features that affect market value. They also note any apparent deficiencies or conditions that affect the property’s value or its eligibility as collateral for the loan.
The second component is the comparable sales analysis, which is the methodological heart of the appraisal. The appraiser identifies recent sales of properties that are similar to the subject property in the same or a comparable market area and uses those sales as the basis for their value opinion.
The comparable sales, often called comps, are properties that closed within a recent timeframe, typically the past three to six months, within a reasonable geographic proximity to the subject property, and with similar characteristics in terms of size, age, condition, and features. The appraiser makes adjustments to the comparable sale prices to account for differences between each comp and the subject property. A comparable that has an extra bathroom that the subject property does not have gets a downward adjustment. A comparable that is older and in worse condition than the subject gets an upward adjustment.
After adjusting each comparable, the appraiser produces a reconciled value opinion that reflects their professional judgment of what the subject property would sell for in the current market based on the evidence provided by the adjusted comparable sales.
The Appraisal Report
The appraiser’s findings are documented in a formal appraisal report that is delivered to your lender. The most common format for residential appraisal reports in Minnesota is the Uniform Residential Appraisal Report, sometimes called the FNMA 1004 after the Fannie Mae form it is based on.
This report is a detailed document that includes the appraiser’s description of the property, their analysis of the neighborhood and market area, the comparable sales they used, the adjustments they made to each comparable, and their final opinion of value.
As the buyer, you have the right to receive a copy of the appraisal report. Your lender is required to provide it to you at least three days before closing if you request it, and many lenders provide it automatically. Reading the appraisal report is genuinely worthwhile because it gives you access to the same market data the lender is using and allows you to understand the basis for the value opinion.
What Happens When the Appraisal Matches or Exceeds the Purchase Price
When the appraisal comes in at or above the purchase price, it is essentially a non-event from a transaction standpoint. Your lender has the independent confirmation of value they needed, and the appraisal component of the transaction is complete. The lender proceeds with the loan on the basis of the agreed purchase price.
This is the most common outcome and the outcome buyers hope for when an appraisal is ordered. A buyer who paid three hundred thousand dollars for a home that appraised at three hundred thousand or higher can proceed with full confidence that an independent professional evaluation supports the price they agreed to pay.
What Happens When the Appraisal Comes In Low
When the appraisal comes in below the purchase price, which is what happened in Eagan, the transaction faces a specific problem that has to be resolved before the loan can proceed.
The problem is straightforward. Your lender will only lend based on the lower of the purchase price or the appraised value. If you agreed to pay three hundred twenty thousand dollars for a home that appraised at two hundred ninety-eight thousand dollars, your lender will base your loan on two hundred ninety-eight thousand dollars. The twenty-two thousand dollar gap between the appraised value and the purchase price is not something your lender will finance.
You now have a gap that has to be covered or the transaction cannot close as originally agreed.
The options available to resolve a low appraisal are specific and each has different implications for both parties.
Renegotiating the purchase price is the most direct solution. If the seller agrees to reduce the purchase price to the appraised value, the problem is resolved. The buyer pays what the property was determined to be worth, the lender’s concern about overcollateralization is addressed, and the transaction can proceed at the new price. Sellers vary considerably in their willingness to do this. A seller who has competing offers or who is confident in the value of their home may be unwilling to reduce. A seller who is motivated and who understands that the appraisal represents the opinion of a credentialed professional may agree to reduce.
Making up the difference in cash is another option. If you have sufficient liquid assets, you can bring additional cash to closing to cover the appraisal gap. This means you are paying the agreed purchase price but funding the gap between the appraised value and the purchase price from your own funds rather than from the loan. This option works for buyers with adequate liquid assets and preserves the transaction at the agreed price, but it effectively increases your cash outlay beyond what you originally planned.
Splitting the difference is a common negotiated middle ground. The seller reduces the price partway and the buyer covers the remaining gap with additional cash. For example, on a twenty-two thousand dollar gap, the seller might reduce by eleven thousand and the buyer covers the other eleven thousand in cash, effectively splitting the gap equally.
Challenging the appraisal through a reconsideration of value is an option when the buyer and their Realtor believe the appraiser made a specific error, overlooked a relevant comparable sale, or made an adjustment that is not supported by market evidence. A reconsideration of value is a formal request submitted through the lender asking the appraiser to review specific information that may not have been considered. The appraiser is not required to change their value opinion, but if the submitted information reveals a genuine error or an overlooked comparable that supports a higher value, they may revise upward.
Terminating the transaction under the appraisal contingency is the final option for buyers who included an appraisal contingency in their purchase agreement and for whom none of the resolution options are acceptable. If the purchase agreement includes an appraisal contingency and the appraisal comes in below the purchase price and no mutually acceptable resolution can be reached, the buyer can terminate the contract and receive their earnest money back.
Why Appraisals Sometimes Come In Low
Understanding why low appraisals happen helps buyers respond to them more effectively and reduces the sense of helplessness that can accompany an unexpected gap.
In rapidly appreciating markets, appraisers rely on comparable sales that reflect prices from the recent past. If the market has moved up quickly, the comparables available to the appraiser may not reflect the most current price level, producing an appraisal that feels outdated relative to where buyers and sellers are currently transacting. This is one of the most common situations that produces a low appraisal in a hot market.
An aggressive offer in a competitive situation may also produce a low appraisal. If you offered twenty thousand above asking price to win a multiple-offer situation, the appraiser’s job is to determine value based on market evidence, not on what you were willing to pay in a competitive moment. If the market evidence does not support the price you paid, the appraisal will reflect that.
Geographic challenges can also produce low appraisals. In areas where comparable sales are limited in number or where properties are sufficiently unique that finding true comparables is difficult, the appraiser’s value opinion may be based on imperfect comparables that do not fully capture the value of the specific property.
The Appraisal in Minnesota’s Market Context
Minnesota’s real estate market has historically been characterized by steady appreciation rather than the rapid swings seen in some coastal markets, which means low appraisals are less common in Minnesota than in markets experiencing dramatic price acceleration.
However, in specific communities and price ranges where competition among buyers has been particularly intense, the disconnect between what buyers are willing to pay and what appraisers can support with comparable sales data has been a real source of transaction complications.
Buyers who are offering significantly above asking price in competitive situations should discuss the appraisal risk explicitly with their Realtor before submitting the offer and should have a clear plan for how they would handle a low appraisal, including whether they have the liquid assets to cover a potential gap and whether the purchase agreement includes an appraisal contingency that would protect them if it does not.
Common Mistakes Buyers Make About Appraisals
Assuming the appraisal is a formality that always confirms the purchase price rather than an independent evaluation that might produce a different number.
Not understanding that they have the right to receive a copy of the appraisal report and not requesting it.
Not including an appraisal contingency in their purchase agreement in a competitive market situation, leaving themselves without protection if the appraisal comes in low.
Not understanding the options available to resolve a low appraisal and panicking rather than working methodically through those options.
Not discussing appraisal risk with their Realtor before submitting an aggressive offer in a competitive situation.
Practical Tips for Minnesota Buyers
Request a copy of your appraisal report as soon as it is available and review the comparable sales the appraiser used to understand the basis for the value opinion.
If the appraisal comes in low, evaluate all resolution options methodically with your Realtor before concluding that the transaction cannot proceed.
If you believe the appraiser overlooked a relevant comparable or made an error, discuss a reconsideration of value with your Realtor and lender rather than simply accepting the initial number.
Include an appraisal contingency in your purchase agreement unless you have a specific, well-considered reason not to and have the liquid assets to cover a potential gap.
Discuss the appraisal risk explicitly with your Realtor whenever you are considering offering above asking price in a competitive situation.
Frequently Asked Questions
Can I choose my own appraiser?
No. Your lender selects the appraiser through the Appraisal Management Company process to ensure independence. You cannot request or select a specific appraiser.
How long does the appraisal take?
The appraiser typically visits the property within a few days of being assigned. The appraisal report is usually completed and delivered to the lender within five to ten business days of the property inspection, though timelines vary based on appraiser workload and property complexity.
Can the seller see the appraisal?
The appraisal is ordered by and belongs to the lender. You as the buyer have the right to a copy. The seller does not have a right to see the appraisal, though in a low appraisal negotiation situation your Realtor may share relevant information from the report with the seller’s agent as part of the resolution discussion.
What if I disagree with the appraisal value?
You can request a reconsideration of value through your lender, providing specific information including comparable sales you believe were overlooked or adjustments you believe were not supported by market evidence. You can also obtain a second appraisal, though the lender is not required to use it.
Does a higher appraisal mean I got a good deal?
Not necessarily. An appraisal above the purchase price means the appraiser determined the property is worth more than you paid, which is generally a positive sign. But the appraisal is just one professional’s opinion based on available data, and market value is ultimately determined by what buyers and sellers agree to in real transactions.
Final Thoughts
The buyer in Eagan worked through her low appraisal with patience and good information. Her Realtor reviewed the appraiser’s comparable sales and identified one recent sale that should have been included but was not. A reconsideration of value request was submitted. The appraiser reviewed the additional information and revised the appraisal upward by twelve thousand dollars. The remaining ten-thousand-dollar gap was split equally between the seller and the buyer, with each party contributing five thousand dollars toward closing the difference.
The transaction closed on time. The buyer had her home.
She told me afterward that the appraisal situation had felt catastrophic when it first arrived and completely manageable in retrospect once she understood what her options were.
That is almost always the way it turns out. The appraisal is not a formality. But it is also not the end of the world when the number is different from what you hoped for. It is information. And information, handled methodically with good professional support, almost always has a path forward.
Lesley The Realtor helps Minnesota buyers navigate every stage of the homebuying process including the appraisal with honest guidance, market knowledge, and the kind of patient support that keeps complicated situations from feeling impossible.
Visit https://buy.dreamhomesminnesota.com/ to start the conversation.