Playing the real estate game sometimes involves a bit of luck and good timing. But the most essential piece of a successful real estate journey is strategy. And depending on the market, appraisal gap coverage may be an important part of your strategy as a buyer.
At Julia Monaghan Real Estate, we recognize the leap of faith it takes to trust someone with buying or selling a home. It’s a significant life decision, and we honor that process by working with integrity, honesty, and compassion.
We have more than a decade of experience in the Portland Metro area and know all the neighborhoods. If you’re ready to buy or sell, from Happy Valley to Hillsboro, let’s talk.
What Is an Appraisal Gap?
A property value appraisal is part of nearly every real estate transaction. It tells you and your lender how much the property is worth.
If you’re getting a mortgage, an appraisal is generally non-negotiable. After all, the bank or credit union needs to mitigate their risk in loaning the money.
But even when you’re paying cash, you can choose to have an appraisal so that you have all the necessary information during the transaction. Important note for buyers: If you are paying cash and want your purchase contingent on the appraised value, you must state that upfront.
In ideal situations, the appraised value is equal to or greater than the agreed sale price. That is, the property is worth at least as much as you are paying for it – or at least as much as you’re asking to borrow.
But if the appraisal comes in lower than the sale price or lower than the lender will loan, you have an appraisal gap.
What Is Appraisal Gap Coverage?
When there is an appraisal gap, a few things could happen:
- The sale falls through because the buyer chooses not to continue. (Note to buyers: BE SURE you are working with an experienced agent who writes an offer that protects you and your earnest money in this situation.)
- The buyer renegotiates with the seller to cover all or some of the gap.
- The buyer chooses to cover the gap.
As the buyer, you can include appraisal gap coverage in your offer. In this type of offer, you indicate how much of a potential gap you are willing to cover. For example, you may write into your offer that you will cover up to $3000 if the appraisal comes in lower than the sale price.
Technically, you can write an offer stating that you will pay to cover the entire gap, called a waiver, but that can become quite costly. No matter how you decide to proceed with an appraisal gap offer, be sure you have expert representation to guide you.
Is an Appraisal Gap Offer a Good Idea?
As with just about anything in real estate, the answer to this question is, “It depends.” It’s critical to consider current market conditions and your specific needs and circumstances when crafting a competitive offer.
In a hot seller’s market, when homes receive multiple offers over the asking price, an appraisal gap offer may be necessary to compete. In a buyer’s market with an abundance of inventory, you typically won’t need to make this type of offer.
By working with an experienced real estate agent who understands your area’s micro-markets, you can make a sound decision about appraisal gap coverage. In general, the following situations are times you may want to consider an appraisal gap offer:
- You’re buying in an ultra-competitive seller’s market with low inventory.
- You are extremely motivated to buy a particular home.
- You have the extra cash to cover a potential gap.
On the flip side, an appraisal gap offer is probably unnecessary when there is a strong buyer’s market or if you have time to be patient and flexible in your purchase.