Author: Heather Connor, Your Crested Butte Lifestyle Agent
What is an Appraisal Gap? An appraisal gap is when your lender’s appraiser says that the value of the home is less than the amount you offered to pay for the property. Thus creating a larger amount of cash that the borrower needs to “bring to the table” to cover the gap. Since the lender will only loan up to the value the appraiser assesses, it creates a potential situation for the buyer. Are you curious – why do appraisal gaps even happen?
An Appraisal Gap Happens for 3 Reasons:
- Hot Market. When home prices increase at a rapid rate, sometimes the appraised value will not increase as quickly. We often see this scenario In a seller’s market, when prices are on a steady and sharp increase and equity gains increase rapidly.
- Lack of Comparables. There may be a lack of general comparables, or if the property is very unique, there may be a lack of similar comparables and the appraiser is left to their best judgement.
- Incomplete Data. The appraiser will do their best to find all data that is relevant to the property. However, they may have missed a recent sale or not included a property that is a strong comparable. Possibly they have utilized inaccurate comparable (such as age or finishes to the property) which affected the valuation to the subject property.
Below is a simple table that better explains what an appraisal gap may look like.
It’s worth stating that this only matters if the property is being purchased through a loan and if the borrower (buyer) has not chosen to waive the appraisal contingency in their offer contract. If the buyer is paying cash, it only affects them if the appraised value alters their personal decision to purchase, and again they have not waived the appraisal contingency. If this subject is valid to you, then what are your options, should this occur?
5 Options You Have as a Buyer When an Appraisal Gap Occurs:
- Accept the appraiser’s valuation of the property and simply cure the difference. This means that you would bring the additional cash to the closing table to cover the monetary difference.
- Leverage the appraisal report to re-negotiate the price of the property. This tactic is historically more successful when it is considered a buyer’s market and the seller does not have alternate/competing offers available. In a seller’s market, the sellers usually have a stronger ability to reject negotiations and move on to the next buyer.
3. Cancel the contract by the termination date. Simple and one of your simplest options. Just ensure you opted for the right to dispute appraisal in your contract offer.
4. Dispute the appraisal valuation. If you find inaccuracies or supporting evidence that the appraisal may be inaccurately low, work with your realtor and they can provide you with supporting paperwork. If you choose to dispute, be mindful of how long this process may take and if it will affect your ability to meet other contract 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 realtor and always get any extensions in writing via an executed contract.
5. Find a New Lender: You can find an alternate lender who will que a new appraisal and hope that the new appraisal comes in higher. Be mindful that starting the process over takes time and in a Seller’s market, they may just move on to the next buyer.
Many clients have asked more detailed questions in regards to disputing an Appraisal Valuation. If you are curious what this process looks like, you can read and watch more in my Vlog titled: Appraisal Review | How to Dispute a Low Appraisal.
As well, I cover 6 ways to cure an appraisal gap, should you not have all the cash on-hand needed. You can watch the video or read the blog in my Vlog titled: 6 Creative Tactics to Cure an Appraisal Gap.
If you have any questions on how this may impact your purchase in a resort mountain community like Crested Butte, book a private consult with me below.