The Low-Down on Appraisal Gaps

With rising home prices, there are more and more instances where a buyer agrees to pay a certain price but then the home itself doesn’t appraise at that value. This happens sometimes during times when the seller’s market is so hot that competitive bidding wars drive up the prices. An appraisal gap can make an already stressful situation hairier but can be tackled if you’re prepared. 

Let’s look at an appraisal gap scenario. For example, if a buyer agrees to purchase a home for $400,000 but the property appraises for $375,000, then there is a $25,000 appraisal gap that has to be taken into account. Why is this a problem? Mortgage lenders approve home loans with the home itself basically acting as collateral. Banks won’t cover more than the home is worth. 

That falls to the buyer. And, after ponying up thousands for a downpayment, not everyone has the extra $25,000 in cash just lying around. 

There are a few actions you can take to address an appraisal gap or perhaps avoid one in the first place: 

• Include an appraisal gap clause in your offer: attack the possibility head-on.
• Request an appeal of the appraisal: ask for another appraisal from a neutral 3rd party.
• Renegotiate with the seller: this is no guarantee but if the seller is motivated, they may be willing to lower the agreed-to sales price.

More than anything, lean on your real estate agent to answer questions for you and navigate you through this tricky process.