appraisal gap

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Does the phrase, “appraisal gap” sound familiar to you? It’s probably a term you’ve become more familiar with if you’re in the buying or selling game right now. But what exactly is an appraisal gap? An appraisal gap is the difference between the appraised value of a home and the contract purchase price.

What does this mean for the seller?

Let’s say a seller lists their home for $300,000. They get multiple offers (because we’re in the crazy 2021 market) and accept an offer for $330,000. This means, the appraiser needs to value the home at $330,000 or more or else a few things can happen:

  • The buyer can back out of the contract.
  • Depending on what was put in the contract language, the buyer would only be responsible for what the home was appraised for.
  • If the above situation happens, you, as the seller, can back out of the contract.

You always have the option to get another appraisal on the home, but it’s not likely there will be that vast of a difference between appraisers’ results. Here is the good news: as the seller in this seller’s market, you, most likely, won’t need to worry too much about an appraisal gap keeping you from selling your home. We are seeing most offers come in with appraisal gap coverage from the buyer. Tell you more? We’ll get there, but first, let’s talk about what all of this means for the buyer.

What does this mean for the buyer?

In the scenario listed above, you, as the buyer have agreed to pay $30,000 over the asking price of the home. If you’re working with a knowledgeable realtor, they had you put something in the contract about an appraisal gap. If this is the home you’ve just gotta have, and your realtor is pretty confident the house will appraise for at least the asking price, you probably put in that you’d cover an appraisal gap up to $30,000. IF the gap is larger than you put in the contract, and you just can’t swing it, you will be able to get out of the contract.

How does appraisal gap coverage work?

One word: cash. Whatever gap may occur, if you as the buyer still really want the house, you’ll have to bring to the table whatever the amount of the gap is, in cash. It can’t be included in your loan. So, again, in the scenario presented above, you would have to bring $30,000 cash to the table plus the cash you were going to put down on the house (if any). 

Remember, appraisals are there to try and help you not overpay for a home. But this market is a different beast, and appraisals haven’t quite caught up yet. Sellers are really looking for appraisal gap coverage in the offers they receive because it’s quite possible that their home won’t appraise for what the agreed upon purchase price is.

This is a simplified way of explaining the appraisal gap, but the best thing is to have a conversation with your real estate agent. They can explain all of it to you and guide you through a situation that, perhaps, you’ve never been in before when buying or selling a home.

We’ve been talking all year about this competitive market, and so far, that hasn’t changed. If you have been putting in offer after offer and are not getting chosen, maybe it’s because you’re not working with the best agent. At Dani Beyer Real Estate, we’ve got some tricks up our sleeves and lots of connections. Please feel free to reach out, even just to get the conversation started! | + posts