What is an Appraisal Gap?

Bridging the Appraisal Gap

So what is an appraisal gap? In today’s hot real estate market buyers often write a contract for more than asking price. They do so in hopes of having their offer be the highest and best offer that a seller receives on their home.  The buyers love the home and want to ensure that they get to move into this home that is the home of their dreams.  So instead of offering the asking price of the home which is $425,000 they instead offer $450,000.  The seller accepts the offer and the buyer and seller are under contract. 

How Value is Determined

During the under-contract period the lender, for the buyer, will order an appraisal.  The appraiser will come view the property and complete a report that compares the subject. They will also look for under contract properties. Finally, they will compare these with other homes that have recently sold in the area. All of this takes place to arrive at an appraised value for the property.

Making Sure the Seller Gets Their Money

The appraisal gap occurs if the appraiser appraises the value of the home as less than the contract price that the buyer and seller have agreed up on.  So, let’s say that the property is under contract at $450,000 and the appraisal comes in at a value of $430,000.  There is a gap of $20,000 in this example.  This means that the buyer and seller have to renegotiate the price of the home or the buyer needs to bring an additional $20,000 to closing that was not a part of their down payment or reserves.  Sometimes, in today’s hot real estate market, buyers say that they will cover the appraisal gap. That means that they will pay the contract price for the property no matter what the appraisal comes in at and there will be no need for the buyer and seller to renegotiate the price of the property. 

Sometimes an Appraisal Gap Falls Short

Other times a buyer’s contract will state that the buyer will cover a certain amount of gap.  For example, the buyer says that if the property does not appraise, they will bring an additional $10,000 to closing.  Let’s use the property that was under contract at $450,000 and appraised at $430,000. The buyer would bring $10,000 to closing and that would make up only $10,000 of the $20,000 gap between the appraisal and the contract price.  The buyer and seller would have to agree what would happen with the $10,000 difference. 

Make it Appealing

A contract that is written covering any appraisal gap can be a huge benefit to a seller.  They do not have to worry about what the appraiser says the value of the home will be.  The seller has peace of mind that the contract price is what the buyer will pay no matter what. For a buyer that really wants a particular home it might be wise to include appraisal gap verbiage in the contract. This gives the seller that peace of mind. It also makes the buyer’s offer as attractive as possible to the seller. 

If you have any questions about how to make your offer the most competitive in today’s market contact us. We would love to help you navigate the intricacies of the real estate process.