Understanding Appraisal Gaps and Why It is Important

In a seller’s market, appraisals can sometimes fall behind the fast-paced market and rising home prices. An appraisal gap is a difference between the actual appraisal and the contract price. Is it possible to avoid covering the costs of an appraisal gap?

First off, what is a Home Appraisal, and why does an Appraisal Gap show up? When buying or selling a home, a home appraisal is required to complete the transaction. It is usually the first step once a sale goes into contract. A home appraisal is a professional opinion by a certified appraiser who evaluates the value of a house.

The appraiser will assess the interior and exterior of a house and the surrounding area. The assessment will include the square footage of the home, the number of bedrooms and bathrooms, household amenities, design, age, and the structure and floor plan. Local market trends and research of comparable homes sold in the neighborhood are also a factor. An appraiser will report back on the overall condition of the house. Note that a home appraisal is different from an inspection. Though they evaluate similar items, an inspector will be the one to suggest any repairs that could help improve the value of the home.

The lender will need to know that the home is valued appropriately to approve the loan amount available to the buyer. If the appraisal comes in below a contract price, lenders will not provide a borrower any amount over what the home is worth. It then creates a gap between the amount of loan a buyer can secure and the contract price on the house because it does not match up.

Fifty-four percent of homes are receiving offers that are over their asking price. However, 19 percent of homes have had their appraised value come in below the contract price in April alone this year, according to CoreLogic. In the two years previous, that is more than double the percentage. The low inventory and high buyer demand have cause appraisal gaps to show up more often in today’s market today.

Take a look at how appraisals impact the sale of a home and sometimes slow the process.

Appraisal gaps tend to be more common in competitive markets. Especially with determined buyers, the bidding wars, strategic tactics come into play, including offering way over price. When a buyer bids with an offer higher than the appraised value, the gap appears.

The buyer is responsible for covering the difference between the appraised value and the purchase price. In most cases, both parties are eager to close the deal, and so the cost gets covered one way or another. It may sound unfair to the buyer, but there are ways to negotiate and use the gap as leverage to win a home.

Include it in the contract – as a buyer, adding an appraisal gap to your offer shows the seller that you are serious and committed to the deal and the price you are willing to pay to cover any gap costs. Make sure you know what dollar amount you can afford. The bank will not lend you more than the appraised value. Knowing this ahead of time will keep you on budget and ensure the seller your offer is less likely to fall through. Everyone involved is happy.

Collaborate and Compromise – if there is a good rapport between the seller and buyer, a mutual agreement may be a good option. Ask your realtor how you can both work together or even split the cost so that the added lump sum is not put on one side only. There are other ways to close the gap through negotiating closing dates or even concessions. Ask your realtor or lender for options prior so that you know your options.

Waivers and Disputes – this approach may not always be the easiest, but there are more aggressive ways to help avoid the appraisal gap. Flaws in the appraisal can come up, and the buyer and the realtor can challenge the appraisal report. Try getting a second opinion if you have questions about the home appraisal before disputing. Waiving an appraisal gap tends to happen with cash buyers. There have been more cash transactions in the housing market these days as a strategy to win the bidding wars. A lender is not involved when buyers use cash, so an appraisal gap will not be present. If you can put down a significant down payment, the appraisal may not be a requirement.

The market continues to move fast in the summer market. Work with a team who knows the neighborhood well and can offer you different strategies. The more you research and become knowledgeable of the market, the more prepared you will be as a buyer. Having a professional team on your side to help you stay head will make your buying experience and process much smoother.

This article is intended to be accurate, but the information is not guaranteed. Please reach out to us directly if you have any specific real estate or mortgage questions or would like help from a local professional. The article was written by Sparkling Marketing, Inc. with information from resources like NAR, CoreLogic, and WSJ.