RE: Appraisal Gaps
As we head directly back into a crazy Spring Selling Season, the words ‘Appraisal Gap’ will be heard quite a bit. If you haven’t heard of this before, keep reading. As I say often, the more knowledge and information you have regarding our market, the easier it will be to make informed decisions!
Appraisal gaps are being offered more and more in our very competitive market as a way to enhance the offer without increasing price beyond what an appraiser will value it at. After all, you can only secure a loan for the appraised value/amount, determined by the appraiser. Let me give you an example in order to understand where the ‘Appraisal Gap’ amount comes from:
The buyer offers a purchase price of $400,000 (contracted amount) and the appraisers opinion of value is $390,000. From this scenario, the mortgage company will only lend the buyer $390,000 for the purchase of $400,000. Therefore, we have a discrepancy of $10,000 between those values. This is essentially the gap between appraised value and sales price. In this scenario, we have 3 potential solutions:
The seller agrees to sell for the appraised value of $390,000 and we move forward with a new sales price.
The buyer agrees to pay the contract price of $400,000 resulting in paying an extra $10,000, due at the time of closing.
Seller and buyer agree to meet somewhere in the middle with seller lowering the sales price and buyer bringing additional funds to closing.
To protect my clients in these scenarios, given that I work on behalf of them to get the best value, these are the methods I utilize:
While I represent the buyer:
I always check the comparable properties and assess my personal opinion of value based on size, bedrooms, bathrooms, updates, lot size, etc. for the surrounding location. This isn’t a guarantee because an appraiser may not see it the same way I do but 90% of the time, it definitely helps in determining a reasonable offer price.
If my buyer desires to provide appraisal coverage, I have very specific verbiage that outlines a specific amount above appraised value that they are willing to pay. I see a lot of variations of the verbiage where it says "buyer will pay any difference", which is scary! What if the appraiser is having a bad day and decides the value is $50,000 less than offered? It doesn't happen too often but it can and then the buyer is stuck contractually paying the $50,000.
I make sure my buyer understands exactly what this means and feels comfortable in the event that they end up paying it. I will never pressure anyone into offering something they aren't comfortable with.
While I represent the seller:
I always request appraisal gap coverage to be outlined in the contract. It is a request, not a demand. If the buyer doesn't want to offer it, they don't have to. I just want to secure the best offer for my seller, working on their behalf.
I attend the appraisal appointment and provide the appraiser with a mountain of documentation justifying my list price and sales price. It absolutely helps to give them a reason to value it higher versus just going based off facts without added reasoning. If you want additional information on what exactly I provide them, just ask me! I'm happy to share!
If you're thinking about a home purchase or sale, I would LOVE to chat with you and see if my marketing plan, knowledge, strategies, and business model are a good fit for each other! Cell- 303.597.6550