What is an Appraisal Gap & Appraisal Gap Coverage Clause?

By
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.
 

Comments (2)

Joan Cox
House to Home, Inc. - Denver Real Estate - 720-231-6373 - Denver, CO
Denver Real Estate - Selling One Home at a Time

Kim, great post with valuable information for buyers wondering what an appraisal gap is.

Oct 25, 2021 06:07 AM
Will Hamm
Hamm Homes - Aurora, CO
"Where There's a Will, There's a Way!"

Hello Kim and great way of explaining it here in the Rain.  Can I reblog it in a couple of weeks?

 

Oct 25, 2021 09:46 AM
Kim N. Bregman

Sure, please include a link back to my website or blog

Nov 18, 2021 09:19 AM