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What Is an Appraisal Gap?

Author Ella Bos

Posted Feb 17, 2023

Reads 12K

An appraisal gap refers to the difference between the contracted price of a property and its appraised value. In other words, it is the shortfall that arises when a house's appraisal is lower than the agreed-upon sale price. This gap can leave both buyers and sellers in a precarious position as they try to navigate the real estate market. While this concept may seem straightforward, there are several factors that contribute to an appraisal gap, making it a complex issue.

In real life, examples of an appraisal gap can be seen when buyers and sellers enter into a contract for a property, only to find out later that its appraised value is less than expected. For instance, imagine you agree to buy a house for $500,000, but during the home inspection process, its appraised value comes back at $450,000. Suddenly, you are faced with an appraisal gap of $50,000 - money that you will need to come up with out-of-pocket if you want to proceed with the purchase. This situation is not uncommon in today's competitive housing market where bidding wars and fast-paced sales can lead to inflated prices.

Understanding the Appraisal Gap: Real-life Examples to Know

An appraisal gap is a common thing in the real estate market. It is the difference between the contracted price of a property and its appraised value. For instance, if you agree to sell your house for $300,000, but it only appraises for $250,000, there is an appraisal gap of $50,000.

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In a heated market where multiple offers are common, buyers may offer more than the property’s actual value to win over the seller. However, when the property didn't appraise for what was offered Woody Fincham from Fincham Associates told us in a phone interview that the buyer may have to come up with additional cash or renegotiate with the seller.

Real-life examples of an appraisal gap include scenarios where sellers are offered more than their asking price but end up getting less due to an unfavorable appraisal. In other cases, buyers may be willing to pay more but find themselves unable to do so because of insufficient funds or unwillingness on the seller's part to renegotiate.

Discover How the Process of a Home Appraisal Works

Home appraisal is a crucial step in the home buying process. A licensed appraiser performs a home appraisal to determine the value of a property. The appraiser evaluates the home based on its condition, safety, sanitation, and soundness they'll count. They also take into account similar homes in the area that have sold in the last six months or longer; these are known as comparable sales or area comps. The appraiser carefully examines every aspect of the house, including bedrooms, bathrooms, and living areas to confirm livable space and any major issues.

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The primary purpose of a home appraisal is to establish positive equity lenders need when funding a loan. If a borrower defaults on their loan, the lender can sell their property to recoup their investment. In today's sellers market with prospective buyers competing in bidding wars, possibly waive an appraisal contingency to make their offer more appealing. However, an appraisal guarantee ensures that the purchase price doesn't exceed the sale price by too much.

One thing to note is that homes’ fair market value fluctuates over time due to factors such as supply and demand or negative equity. When determining your loan amount versus your home’s appraisal amount versus loan amount, remember that lenders won't approve an amount higher than what they believe you're able to pay back. For starters, this means ensuring you have enough money for a down payment or possibly saving up for an appraisal gap if it occurs.

How to Overcome the Challenge of an Appraisal Gap

When buying or selling a home, you may encounter an appraisal gap. An appraisal gap occurs when the appraised value of a property is lower than the agreed-upon purchase price. This can be due to various factors such as the heated market conditions or outdated comparable sales used by the appraiser determined in their appraisal report. When faced with an appraisal gap, there are several ways to overcome this challenge.

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One way to overcome an appraisal gap is to request a detailed additional narrative from the appraiser explaining their reasoning behind the appraisal results. This information can help identify any red flags and provide insight into how they valued the property. Additionally, you could ask for six-month-old comparable sales which are more up-to-date and reflective of current market conditions. Another approach is to hire a second appraiser who can provide a different perspective on the property's value. By considering these options, you can navigate through an appraisal gap and successfully close your real estate transaction.

Understanding the Appraisal Gap: What You Need to Know

Woman Wearing Bigger Jeans, Showing Gap

What is an appraisal gap? An appraisal gap refers to the difference between the fair market value of a property and its appraised value. In other words, it's the discrepancy between what a seller thinks their home is worth and what a buyer's lender thinks it's worth. This can create issues during the home buying process because if a buyer's lender determines that a property's appraised value is less than the agreed-upon purchase price, they may refuse to lend the full amount, leaving the buyer to come up with the remaining funds on their own. However, just because there is an appraisal gap doesn't necessarily mean that the deal is dead in the water. There are strategies that both buyers and sellers can employ to bridge this gap and come to an agreement that works for everyone involved.

What’s The Appraisal Guarantee Clause?

In a sellers market, where buyers outnumber sellers, sellers require whats known as an appraisal guarantee clause. This clause is added to the accepted offer and states that if the home does not appraise for the agreed-upon purchase price, then the buyer will cover the difference between the appraised value and the purchase price. To protect themselves against this risk, many buyers are turning to appraisal protection programs offered by mortgage lenders. These programs allow buyers to apply online and receive expert recommendations on how to ensure they are protected in case of an appraisal gap. With real interest rates at historic lows, it's essential for buyers to understand their options for protecting themselves in a competitive real estate market.

Frequently Asked Questions

What is appraisal gap coverage and why is it important?

Appraisal gap coverage is a type of insurance that protects homebuyers from facing financial losses if the appraisal of their property comes in lower than expected. It's important because it helps to bridge the gap between the purchase price and the appraised value, ensuring that buyers can secure their dream homes without breaking the bank.

Can I withdraw my offer to cover an appraisal gap?

Yes, you can withdraw your offer to cover an appraisal gap, but it may affect the outcome of the home sale negotiations. It's best to communicate with the seller and their agent before making any decisions.

What happens if appraisal is lower than offer?

If the appraisal is lower than the offer, the buyer may need to increase their down payment or negotiate with the seller to lower the purchase price. It's important to work with a qualified real estate agent and lender to navigate this situation.

What happens if the appraised value of a home is lower?

If the appraised value of a home is lower than the sale price, the buyer may need to come up with more cash or negotiate a lower purchase price. In some cases, the lender may also refuse to finance the full amount of the loan.

Do you have an appraisal gap after signing a sales contract?

Yes, an appraisal gap can occur after signing a sales contract if the appraised value of the property is lower than the agreed-upon sale price. This may require renegotiation between the buyer and seller or cancellation of the contract.

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Ella Bos

Writer at CGAA

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Ella Bos is an experienced freelance article author who has written for a variety of publications on topics ranging from business to lifestyle. She loves researching and learning new things, especially when they are related to her writing. Her most notable works have been featured in Forbes Magazine and The Huffington Post.

Ella is passionate about helping others learn through the power of storytelling and believes that everyone has a story to tell. Outside of writing, Ella enjoys spending time with her family and friends, exploring nature, and reading books in her spare time. She also loves taking part in various charity events throughout the year.

Ella is a well-rounded individual who strives to make a positive impact on the world every day.

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