When purchasing a home, one of the standard contingencies is a home appraisal. A professional home appraiser determines the value of the home based on recent sales in the area and the condition and location of the home. The appraiser measures the home, takes pictures, and then prepares a report to send to the bank. The bank wants to make sure it’s comfortable with the home as collateral for your new loan.
If the appraised value is at the contract price, as it often is, then the buyer is able to remove their appraisal contingency and move forward. In today’s hot market, some buyers are deciding to completely waive the appraisal contingency to make their offer more competitive even at the risk of the appraisal coming in low. Other buyers who don’t feel comfortable waiving the appraisal contingency but are willing to pay a fixed amount above the appraisal value might choose to implement an appraisal gap clause.
An appraisal gap clause is a contract term stating that the buyer agrees to bring in additional funds up to a certain amount if the appraisal value is below the contract price. For example, if a buyer agrees to cover an appraisal gap up to $50,000 and offers $725,000 on a home that only appraises at $675,000, then no additional negotiations on the price would be required even though the appraisal came in low.
But let’s say that the contract price is $725,000 and the appraisal comes in at $675,000 but the buyer agreed to cover a gap of up to $20,000. In that scenario, either the buyer could agree to cover the additional gap or the buyer and the seller could negotiate to a new purchase price somewhere in the middle.
Appraisal gaps are just one reason why this can be a very difficult market to navigate. As agents, we’ve seen these situations arise and have walked both buyers and sellers through their options, helping them gather the information they need to make decisions they’re comfortable with. The reason why appraisal gaps have become such a hot topic these days is because home prices are escalating so quickly that appraisers sometimes don’t have comparable sales to support contract prices. Bidding wars are causing offers to go way over asking price.
If you have any questions about appraisals, buying or selling a home, or anything else real estate related, we’d love to help. Give us a call at 562-896-2456.
