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When home prices increase at a rapid rate, sometimes the appraised value will not increase as quickly. When you are financing the purchase of a property and the appraisal does not come in as high as the purchase price of the property, we call this an appraisal gap.
The most common time we see this occur is in a “hot” market that is experiencing low inventory and high buyer demand which can result in steady or rapid price increases. Of course, appraisal gaps can happen for numerous reasons. Other examples are there could be a lack of general comparables, which can happen in a small market or if the property is very unique. Whatever the reason may be, how much control do you have as a buyer n this scenario? Let’s talk about some options below.
It’s worth re-stating that this only matters if the property is being purchased through a loan and the buyer does not have enough funds to bring the difference to the closing table. If the buyer is paying cash, it only affects them if the appraised value alters their decision to purchase. (Although, it’s more rare for cash buyers to even request an appraisal.)
Now when a loan is involved, what are your options?
1. You can accept the appraiser’s valuation of the property and simply cure the difference. This means that you would bring the additional funds to the table to cover the monetary difference between the loan amount and the appraised value.
2. You could attempt to leverage the appraisal report to negotiate the price of the property. This tactic is historically more successful when it is considered a buyer’s market. In a seller’s market, the sellers usually have a stronger ability to reject negotiations and move on to the next offer.
3. You can cancel the contract by the termination date.
This is pretty straight-forward, just be sure you either meet the original dates or they are adjusted contractually with the seller. Your agent will alert you to these details to be sure you are protected during this process.
4. You can also ask to dispute the valuation. If you choose to dispute, be mindful of how long this process may take and if it will affect your ability to meet other dates and deadlines. For example, could the delay affect dates such as closing, appraisal objection or any other dates and deadlines? Make sure to discuss with your agent and always get any extensions in writing via an executed contract. Oftentimes this will require an extension of dates and thus the agreement of the seller.
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Review comparable properties that were missed or that should be removed.
Be sure to look through the comparables closely and see if any seem like they should be removed and if any solid comparables are missing from the report. You will want to make a logical claim and offer subject properties that back up the dispute.
Some potential outcomes after your dispute process.
If the valuation ends up being adjusted to the purchase price or higher then you have successfully disputed the valuation and can move forward to closing. It’s also possible the value is adjusted higher; however not to the full purchase amount. If this occurs, then you may have the option to terminate the contract, cure the difference or see if the sellers will adjust the purchase price.
Your options at this time are all based on what was discussed and negotiated with the sellers. It’s worth noting that this is an area that you’ll see the value of having a seasoned agent that is strong in their understanding of contracts and negotiations.
Disclaimer: We do our best to source factual data from the best resources out there. However, it’s always advised for consumers to perform their own due diligence, confirm accuracy and consult a legal or real estate professional. All information is deemed reliable but not guaranteed.
