How to Bridge the Appraisal Gap in Today’s Real Estate Market
Traditionally, the sale of a home is contingent on a satisfactory valuation. But in a rapidly appreciating market, it can be difficult for appraisals to keep pace with rising prices. Thus, many sellers in today’s market favor buyers who are willing to guarantee their total offer price—even if the property appraises for less.
Whether you’re a buyer or a seller, it’s never been more critical to understand the appraisal process and how it can impact a quickly appreciating and highly competitive housing market.
APPRAISAL REQUIREMENTS
An appraisal is an objective assessment of a property’s market value performed by an independent authorized appraiser.
Appraisal requirements can vary by lender and loan type. In today’s market, this helps to reassure the buyer (and their lender) that they are paying fair market value for the home and allows them to cancel the contract if the appraisal is lower than expected.
APPRAISALS IN A RAPIDLY SHIFTING MARKET
Low appraisals are not standard, but they are more likely to happen in a rapidly appreciating market, like the one we’re experiencing now. That’s because appraisers must use comparable sales (commonly referred to as comps) to determine a property’s value.
HOW DOES A LOW APPRAISAL IMPACT BUYERS AND SELLERS?
When a property appraises for less than the contract price, you end up with an appraisal gap.
Appraisal Gap Coverage
Buyers with some extra cash on hand may opt to add an appraisal gap coverage clause to their offer.
For example, let’s say a home is listed for $200,000, and the buyers offer $220,000 with $10,000 in appraisal gap coverage. Now, let’s say the property appraises for $205,000. The new purchase price would be $215,000. The buyers would be responsible for paying $10,000 of that in cash directly to the seller.
Waiving The Appraisal Contingency
If you’re a cash buyer, you may choose—but are not obligated—to order an appraisal. This strategy isn’t for everyone and must be considered on a case-by-case basis.
It’s important to remember that waiving an appraisal contingency can leave a buyer vulnerable. Without it, a buyer will be obligated to cover the difference or be forced to walk away from the transaction and relinquish their earnest money deposit to the sellers.
DON’T WAIVE YOUR RIGHT TO THE BEST REPRESENTATION
In this tough market, you need a master negotiator on your side who has the skills, instincts, and experience to get the deal done regardless of how many surprises pop up along the way. If you’re a buyer, we can help you compete in this unprecedented market—without getting steamrolled. And if you’re a seller, we know how to get top dollar for your home while minimizing hassle and stress. Contact us today to schedule a complimentary consultation.
Sources:
- Wall Street Journal -
https://www.wsj.com/articles/u-s-home-prices-push-to-record-high-slowing-pace-of-purchases-11621605953 - US News & World Report - https://realestate.usnews.com/real-estate/articles/what-is-a-home-appraisal-and-who-pays-for-it
- Rocket Mortgage –
https://www.rocketmortgage.com/learn/appraisal-waiver - Money -
https://money.com/coronavirus-low-home-appraisal/ - S&P CoreLogic Case-Shiller 20-City Composite Home Price NSA Index - https://www.spglobal.com/spdji/en/indices/indicators/sp-corelogic-case-shiller-20-city-composite-home-price-nsa-index/#overview
- Bigger Pockets -
https://www.biggerpockets.com/blog/appraisal-gap-coverage - Washington Post -
https://www.washingtonpost.com/realestate/competitive-buyers-waive-contingencies-to-score-homes-in-tight-market/2021/06/02/d335b050-af2c-11eb-b476-c3b287e52a01_story.html
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