In today’s low-inventory, high-demand market home sellers are regularly getting multiple — and sometimes dozens — of offers, and transactions are closing at record speeds. As a result of COVID overlapping showings have largely been eliminated and as a result buyers are being limited to private showing windows of just 15-30 minutes (if the property isn’t sold before the showing window even starts through a “curb offer”).
“Competitive” has taken on a whole new meaning, with homes regularly selling for thousands over list price, and often above the appraised value. With all this money flying around, sellers are accepting sky-high offers from overeager buyers who find they’re at risk of falling into the appraisal gap.
One of the strategies buyers are using is to offer over list price often, $5,000, $10,000 or even $20,000 over list (the extent of the gap coverage varies between price points and communities). Sometimes the the house is under priced and is in fact worth more than the list price. Other times the buyer loves the home and is willing to pay a premium price and/or they wish to lock in today’s mortgage interest rates and home prices (both of which are on the rise right now). A home may easily be worth the purchase price by the end of the year.
Understanding appraisals
When you go to buy a home, your mortgage lender will almost always order a home appraisal.
The purpose? They want to verify the home’s worth. Specifically, they want to be sure it’s worth the money they’re lending you and, most importantly, that they’ll recoup their investment if you default on the loan. Put simply, it’s a risk-mitigating measure.
If the appraisal on the home you are purchasing comes in low, you could end up with an appraisal gap — a discrepancy between your offer on the home and what the property is actually worth.
When this happens, your lender will only loan you up to the appraised value.
What is appraisal gap coverage?
Appraisal gap coverage is an agreement to cover the difference between the offer price and the appraised value. It is written into your purchase offer and includes a specific dollar value you are willing to contribute over the appraised value to help bridge the appraisal gap.
Appraisal gap coverage isn’t a new negotiation tactic for a hot market like the one we’re currently in but rather it is a tactic to make your offer more competitive allowing you to beat out other buyers.
Let’s consider an example. Say you write a purchase offer for $350,000 and include an appraisal gap guarantee clause agreeing to pay up to $10,000 over the appraised value should the appraisal fall short of the purchase price. If (a) the appraiser returns a value of $350,000 your loan would cover the value, the appraisal gap clause would not be triggered and no additional contribution is required (b) the appraiser returns a value of $342,000, your loan would cover this value, the appraisal gap clause would be triggered and you would be required to contribute an additional $8,000 out of pocket to bridge the appraisal gap (c) the appraiser returns a value of $338,000, your loan would cover this value, the appraisal gap clause would be triggered and you would be required to contribute the maximum $10,000 (but not the full $12,000).
How does appraisal gap coverage differ from an appraisal contingency?
An appraisal contingency is a contract contingency which makes the purchase offer subject to the home appraising for the contract price. The appraisal contingency allows the buyer to walk away from the deal — with their earnest money — if the appraisal value comes in short. While the buyer is still responsible for the cost of the appraisal, this is much less than the earnest deposit.
With an appraisal contingency, if the appraisal comes in short and there is an appraisal gap you have with three options if you wish to move forward with the sale. First, you can make up the difference in cash. If it’s only a few thousand dollars and you have the additional cash on hand to cover the deficiency, this might be an option. If not, you have two other options.
You can also attempt to renegotiate with the seller. There’s a chance the seller may be willing to accept a lower offer on the home perhaps by agreeing to reduce the purchase price to the appraised value, or to split the difference with you. If the seller has already moved out, bought another property or it’s a buyer’s market and supply exceeds demand. Your real estate agent can help if you decide to go this route. You can also:
- Ask for seller concessions to make up for the increased price.
- Offer free lease-back, letting them stay in the home while they find their new place.
- Change your closing date to a more convenient one for the seller.
Finally, you can also back out of the contract entirely. Again if your offer included an appraisal contingency, you could terminated the contract without any sort of penalty. If you didn’t include this contingency and elected to terminate the contract, you would have to forfeit your earnest money deposit.
If you, or someone you know is considering Buying or Selling an Investment Property in Columbus, Ohio please give us a call and we’d be happy to assist you!
The Opland Group Specializes in Real Estate Sales, Luxury Home Sales, Short Sales in; Bexley 43209 Columbus 43201 43206 43214 43215 Delaware 43015 Downtown Dublin 43016 43017 Gahanna 43219 43230 Grandview Heights 43212 Galena 43021 Hilliard 43026 Lewis Center 43035 New Albany 43054 Pickerington 43147 Polaris Powell 43065 Upper Arlington 43220 43221 Westerville 43081 43082 Worthington 43235
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