What is “Appraisal Gap Coverage”?

Appraisal Gap Coverage

What is Appraisal Gap Coverage?

We are, and have been, in one of the hottest “sellers markets” in Colorado real estate history. Having an agent that understands strategies for write a winning an offer is not only something to consider , it’s critical! An appraisal gap is one of the best tools to strengthen your offer in this competitive market. As a buyer, it can show a seller you’re serious about their home. As a seller, it can give you the confidence you need to accept a high offer.

 

The Appraisal Gap and What it Means to the Home Seller/Buyer:

In Colorado’s incredibly competitive seller’s market, home buyers must anticipate a multiple offer situation. As a result, an appraisal gap is a great inclusion in a contract offer. However, before you write this clause into an offer, make sure you have a clear understanding of what you’re offering. Be sure to determine how much cash you have available to cover the difference between the appraisal and the contract price.

Here is an example of what CAN happen with an appraisal gap: Say a home is listed for $500,000 and it goes under contract for a sale price $510,000. However, the appraisal comes in at only $505,000. Your mortgage lender won’t cover the gap for you. In this scenario, there are four options:

1. The buyer pays the additional $5,000 cash to make the deal happen
2. The seller pays the additional $5,000 to make the deal happen (dropping the price to $505,000)
3. Buyer and Seller “split the difference” with a new sales price of 507,500 and the buyer bringing the 2,500 cash to make the deal happen
4. The deal terminates

This appraisal gap is the difference between the appraisal and the contract price. To cover the difference, the home buyer agrees to provide cash to cover that gap.

So what is “appraisal gap coverage?”/ an “appraisal gap clause”

 

Appraisal Gap Coverage is when the the buyer states that they agree to cover the gap between the appraised value and the list price. This clause usually looks something like this

“In the event that the property does not appraise at the purchase price, Buyer agrees to bring the balance in cash to closing between the agreed upon purchase price and the appraised value, not to exceed the purchase price in this contract of $(contract price) as long as the minimal appraised value is $(list price). Should the appraisal be below the list price of $(list price), both buyer and seller agree to renegotiate the terms of this contract to match the appraised value. “

 

If you are making an offer on a home that’s been on the market for a few weeks, you may be able to get by without an appraisal gap. Make sure you discuss the scenarios with your broker to help you determine the best game plan.

 

If you have further questions about an appraisal gap clause may help strengthen your offer in the process of buying a home, please feel free to email or call me any time. I’d be happy to talk to you!  

 

If you’re ready to take the next steps in your home buying process and you’d like a Realtor that takes social responsibility and impact to heart…know that I will advocate for, support and educate you every step of the way and  I’d LOVE to be considered for the job!

Sincerely,
Jessica