Appraisal gaps in today’s market
Rapidly rising home prices have led to an increasingly common challenge for home buyers and sellers: the appraisal gap.
When a home’s appraised value comes in lower than the contracted purchase price, buyers must either cover the difference, renegotiate, or walk away.
Luckily, there’s a multitude of ways to deal with an appraisal gap. Buyers should work closely with their agent or Realtor to structure their offer in a way that protects against appraisal gaps — and have a contingency plan in case one happens.
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What does an appraisal gap mean?
An appraisal gap happens when the appraised value of a home for sale comes in lower than the contracted purchase price agreed upon by the buyer and seller.
Appraisal gaps are common in a hot real estate market. When the number of homebuyers surpasses the inventory of homes available on the market, home prices rise swiftly.
As home prices increase at a faster pace than recent sales for comparable homes, appraised values struggle to keep up. And, as buyers bid over the asking price to win those homes, appraisal gaps can easily happen.
Appraisal gap example
For example, let’s say the list price on a home you’re eyeing is $300,000. To make your offer more attractive, you submit an offer for $325,000 with a down payment of 5%.
The seller accepts your offer, but the appraisal comes back at just $305,000. Unless the seller agrees to lower the price, you’ll need to come up with additional funds.
- Purchase price: $325,000; 5% down payment = $16,250
- Appraised value: $305,000; 5% down payment = $15,250
- Difference between purchase price and appraisal: $20,000
- Total cash needed (down payment + appraisal gap): $35,250
You don’t always need to cover the full appraisal gap in cash, though.
Jon Meyer, licensed MLO and The Mortgage Reports loan expert, explains that “covering the difference out of pocket …….
Source: https://themortgagereports.com/89399/appraisal-gap-definition-and-options