Here’s what an appraisal gap is and how to handle them when they happen.
When buyers are willing to pay more for a house than an appraiser deems the property is worth, that can become a problem because the buyer won’t be able to complete their loan. Typically in cases like this, the seller looks to the buyer to make up the difference. For example, if it’s a $200,000 sale but the appraisal comes in only at $180,000, the seller will ask the buyer to provide the extra $20,000 to cover the gap since they had already agreed to pay the $200,000. The buyer might come back to say that their purchase is contingent on the home successfully appraising and that they’re willing to pay the price at which the home is valued. At that point, there’s a disagreement between the parties.
What is the solution? Neither side can force the other to do what they want, but it does help to set expectations ahead of time before the offer is made. Often, buyers agree to make up the gap using an appraisal gap guarantee, which states how much above the appraised value they’d be willing to pay. Then the seller can decide whether or not to accept that offer based on other offers they’ve received.
If you are a seller, be cautious when you’re negotiating. The highest offer isn’t always the best offer. For example, if someone has a low down payment, it might indicate that they don’t have a lot of extra cash when it comes time to negotiate. The best offer is the one that has the highest chance of making it to the closing table successfully.
According to CoreLogic, appraisal gaps are happening more and more frequently. About one in five of all deals that involve a loan have appraisals that come in low. Just a year ago, around 7% of all deals had a low appraisal.
If you’re a buyer, be prepared to put down less to make up an appraisal gap. If you’re a seller, pay attention to how much people are putting down on their offers, and talk to your real estate agent about pricing your home in a way that will give you the greatest chance of getting buyers to offer an appraisal gap.
If you have any questions about today’s topic or the market in general, don’t hesitate to reach out to us. We’d love to help you.