The appraisal gap is a term that has become increasingly significant in real estate, particularly in a competitive housing market.
Understanding the appraisal gap and how to handle it can be crucial for buyers and sellers to navigate the complexities of property transactions.
What is an appraisal gap?
If you are dealing with an appraisal gap, the appraised value of the property you want to buy (or sell) is lower than the sale price you agreed to.
Appraisals are professional evaluations conducted by licensed appraisers who assess the fair market value of a property based on comparable sales, market conditions and the property’s features.
In a competitive market, multiple offers and bidding wars may drive the sale price above the appraised value, leading to a gap. This discrepancy can impact the buyer’s ability to secure financing, as lenders typically base their loan amounts on the appraised value rather than the sale price.
Tips for handling an appraisal gap
If you are dealing with an appraisal gap, there are a few things you can do to handle the situation. These include the following:
- Negotiate with the seller: You can negotiate to lower the sale price to match the appraised value.
- Challenge the appraisal: Buyers can challenge the appraisal if they believe the appraised value is inaccurate. They can provide additional comparable sales data, point out errors in the appraisal report or request a second appraisal.
- Increase the down payment: To cover the appraisal gap, buyers can increase their down payment to reduce the loan-to-value (LTV) ratio.
- Obtain a gap loan: In some cases, buyers can secure a separate loan, known as a gap loan, to cover the difference between the appraised value and the sale price.
- Walk away: Buyers can walk away from the deal if all else fails.
Understanding your rights and options
Navigating the appraisal gap can be challenging for buyers and sellers, but understanding the available options can lead to a successful resolution. Knowing your rights and options will help you handle this situation.