In today’s booming housing market, sellers have their pick of home offers. According to a study by Realtor.com, the median home listing price is up 15.6% compared to last year.
Now, more than ever, sellers have a chance to get more money for their homes. And while this is great for sellers, it leaves buyers asking: “How can I stand out in such a competitive market?”
One way buyers can stand out is with their offer. This isn’t the market for low offers, which is why buyers may think the only option is putting in a high offer. This often means going above the listing price. But what happens when the seller accepts that high offer and the home appraisal comes in far lower?
What is an appraisal gap?
Before purchasing a house, a buyer’s lender will hire an appraiser to appraise a home. The goal of an appraisal is to ensure the price of the home matches or exceeds the home’s listing price. If it does, everything is fine. But if it doesn’t, things can get complicated.
If the appraisal is lower than the home’s price, a lender won’t approve the loan for that amount. For example, if the listing price is $300,000 but it appraisers for $250,000, the buyer now has to come up with the difference.
Why did the appraisal come in too low?
There are several reasons why a home with a high price tag might not appraise for as much. For one, bidding wars (like the ones we’re currently seeing) can cause listing prices to skyrocket, even if the home isn’t necessarily worth the price.
With that said, if the appraisal comes in too low, you have a few options:
- As a buyer, you have the option to increase the down payment to make up the difference. You can also take some of the money you’ve set aside for a down payment and use it to close the appraisal gap.
- Lenders have the power to appeal the appraiser if they, or the buyer, think there are discrepancies. Keep in mind, the appraisal might still stand.
How to avoid paying more?
Buyers should consider adding an appraisal gap coverage clause in their offer. To put it simply, appraisal gap coverage is when a buyer agrees to cover a certain amount of the difference between the offer price and the appraisal value – if, in fact, there’s an appraisal gap.
For example, let’s say you offer $200,000 on a home. In your appraisal gap coverage clause, you could say you’re willing to pay $10,000 over the appraised value. If the appraised value ends up being equivalent to the listing price, you don’t have to pay any extra money. But if the appraised value is under, be prepared to come to the table with more money.
The benefit of having an appraisal gap coverage clause is it shows the seller you’re serious about purchasing the home, without you having to offer an obscene amount of money. It also provides you with the option to cancel the contract, if there’s an appraisal gap.