Real Estate Agent with Optima Properties BK 496540
An appraisal gap is the difference between the fair market value determined by the appraiser and the amount you agreed to pay for the home.
An abnormally high number of homes across the United States are being appraised below their agreed-upon sales prices, causing some deals to implode.With home prices soaring in recent months, buyers often pay above asking price to win bidding wars. As a result, CoreLogic estimated that about 13% of appraisals came in below the contract price in August.
A home appraisal is an evaluation and report performed by a licensed appraiser to determine a home’s fair market value. Lenders require a home appraisal to ensure the amount you agreed to pay for the home is equal to or less than the appraised value. To create a home appraisal, appraisers normally rely on factors like data from recent closed and pending sales. But since sales usually close a month or two after going under contract, rapidly increasing home values can sometimes skew appraisals that rely on home values recorded months earlier.
In today’s hot market, many prospective buyers will get into bidding wars and possibly waive the appraisal contingency or offer an appraisal guarantee up to a certain amount. In both cases, the buyer would have to come up with the difference in cash between the appraisal and the sale price, or their appraisal guarantee and the sale price.
The disparity underscores the risks buyers face in the current market, especially those stretching their dollars to win a bidding war. Mortgage lenders will typically offer only enough to cover the appraised value of a home, forcing buyers to either provide the balance, renegotiate, or terminate the deal if an appraisal comes in below the contract price.