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What happens when a buyer’s offer leads to a major appraisal gap?

On Behalf of | May 2, 2022 | Real Estate |

As a real estate agent, your job is to help buyers find the right property and then manage the sometimes complicated process of submitting a bid and closing on the home. In recent years, a shortage of adequate housing supply has meant that it takes longer for buyers to find a property to make a bid on and even longer to have a bid accepted on a house.

Houses now often sell for more than the asking price, a situation that can lead to complications between the submission of the offer and the closing table. Sometimes, the reason sellers price their house the way they do is because they know roughly what the home will appraise for and don’t want to ask for more. If your client offers more than asking to be competitive, they risk an appraisal gap, which is when their offer is more than what the appraiser says the home is worth.

How can you help your buyers navigate that challenge?

Plan ahead for a possible appraisal gap

When you advise your buyers to make an offer over the asking price, you need to be realistic about the possibility of an appraisal gap. Even though lenders want to issue mortgages to make money, they don’t want to overextend themselves by financing the purchase of a property at a price that they will not be able to recover if they foreclose on the home.

Recognizing when there may be an appraisal gap can help you plan to overcome one should the issue arise. Buyers can use liquid capital reserves of their own to close the gap between the appraised value of the home and their offer. They may need to do this in addition to whatever earnest money or down payment they have already committed to making.

When buyers don’t have enough cash on hand to cover the appraisal gap, they may need to get more creative, such as taking a personal loan from family members or selling one of their vehicles. Sometimes, buyers can find a different lender who will have a new appraisal done and will approve them for a higher mortgage.

You can protect against the impact of a gap in the initial offer

When buyers want to be more competitive, they often choose not to include contingencies in the offers they make on properties. The problem with this approach is that it leaves the buyers vulnerable to losing money if the purchase falls through because of an appraisal gap or similar issue. By advising that your clients include an appraisal contingency and possibly a financing contingency, you help protect them against the loss of their earnest money when the situation is actually out of their control.

Understanding how to address common issues that arise in modern real estate transactions will enable you to offer better professional support to your client.


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