Avoid appraisal gap.
June 03,2022 | Posted By Flavia Brown in Real Estate
Helpful notice to potential home buyers (offerors):
The current strong seller’s market has caused a few problems for buyers. One costly problem for buyers with financing (borrowers) is presenting offers higher than the list price and having to deal with “appraisal gap.” For example, a house is listed at $1,350,000 and Joe Buyer knows there are eleven other offers on the table. But Joe has been looking for the right house for five months, so he wants to be the successful bidder for this house. So he goes all out and tells his Realtor to present an offer for $1,450,000. Wow! His offer was accepted. Next step: his lender hires an appraiser (a required step) and the house appraises at $1,340,000, almost at the asking price. This is the “appraisal gap.” Somebody will have to pay the difference, or the lender won’t finance the purchase. Who pays is negotiable, but it is often split between the buyer and seller. However, in strong seller’s market buyers either pay the gap amount or their lender will back out of the financing.
One of the purchase agreement’s paragraphs explains that “this offer is contingent upon the property appraising at no less than the purchase price.” The problem with that is the seller won’t accept an offer with that contingency. Therefore, in a hot seller’s market the buyer may want to waive the appraisal contingency.
Another complication may be a list price being lower than market value, to purposely generate multiple offers. If that is the case, and the comps are carefully analyzed which proved that the list price is lower than fair market value, a higher offer will probably be supported by the appraisal.
So, except for purposely lowered list prices, the warning to buyers with much higher-than-list-price offers is to expect the appraisal to be lower than the purchase price. So buying at a high price could be compounded by paying the appraisal gap. However, if you feel confident that the house you just bought will substantially increase in value fairly quickly, and you have sufficient evidence to support that prediction, you could be okay with the extra money spent. But if you aren’t as confident, don’t become a member of the large “buyer’s regret” group. I mean it is a fact that many recent buyers regret that they were the winning bidder because they also had to pay thousands of dollars for the purchase price and appraisal differential.