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One of the first things your lender will ask of you when you’re buying a home is to have its value appraised by a professional. Most of the time, if the unit was priced correctly, your appraiser will value the home at a price close to (or higher than) your contract price. But what happens if the appraisal comes at a lower value than your agreed upon price?
What Is an Appraisal Gap?
An appraisal gap is the difference between the appraised value of a home and the contracted price of the home. Basically, it means you agreed to a price with the seller, but an independent appraiser believes the price is too high than what the property is worth. Appraisal gaps become more common when there is low housing inventory and high demand for properties, and a lender may not lend if the proposed price of the home is higher than the appraised value. Homebuyers facing an appraisal gap will need to make a decision about proceeding with the sale based on this information.
How Does an Appraisal Gap Work?
If an appraisal gap occurs, there are two ways to proceed: sellers can either dispute or accept the appraised value. The buyers may ask the seller to lower the price but if the market is hot, a seller may have a few back-up offers and choose to proceed with one of those at their original asking price. If the seller chooses not to lower the price, buyers can then back out of the deal using an appraisal contingency in the contract of sale. If the buyer isn’t willing to cancel the sale and can’t negotiate a lower price, they’ll need to pay the appraisal gap amount in cash as part of purchasing the home, so they would have a larger down payment.
Disputing an Appraisal Gap
In order to dispute the appraisal gap, you should look closely at the report and see how the appraiser determined the value of the home; look at the comparable properties they used and the adjustments they made and decide if they really do compare to your unit at the current market. If the report fails to take into account local market trends, the buyer and their real estate agent may ask for a new appraisal.
What Appraisal Gaps Mean for Home Purchase in Competitive Markets
Many sellers prefer a cash offer because it isn’t dependent on a favorable appraisal. Competitive markets tend to see more cash offers, which makes it harder for buyers to compete. To make your offer more appealing, you may want to agree to pay an appraisal gap of up to a certain value and reserve the right to withdraw from the deal if a gap is larger than that amount and put it into your contract of sale.
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I always advise to use a good real estate agent when shopping for apartments and this is just one more good reason to do so: a good agent will have a sense for whether a home is overpriced or likely to come back with an appraisal gap. We can advise you - our client - and provide any relevant comparable sales.
Source: The Balance Money
