Appraisal Gap

Getting a competitive edge with …

Appraisal Gap Coverage.

We’ve all heard it before, it seems and feels impossible to make your offer competitive and stand out in the sea of offers on your dream home. You’ve lost out on a couple of homes previously to someone who put in “Appraisal Gap Coverage”.

But what does that even mean? Allow us to explain.

When you want to buy a home, the market determines what the fair market value for the home is and generates a listing price - the price that seems like an appropriate value for a home given what has recently been sold in the market. So, you see a house that has just come on the market for $400,000 - right in the sweet spot of your budget. Nicely updated, perfect location, and a backyard you’ve been waiting for.

Bad news.

Everyone else loves it too. What happens when everyone else loves it? Multiple people will decide it’s their dream home too and put in an offer in an effort to secure the home. Someone says, I want to beat the last person so I will offer to pay $405,000 for the home.

Well, that catches on and the next person says I will pay $410,000, and before you know it the home has bid up to $15,000 over the asking price because of an escalation clause.

Lucky for you, that highest bid was your offer! You’ve secured the contract by agreeing to purchase the home listed at $400,000 (what the seller assumes market value is) for $415,000 (what you are willing to pay for the home). 

Well, lucky for you, your realtor (probably me) coached you on the crafting of an appealing offer that included Appraisal Gap Coverage.

Something you should know first: If you are financing this home (securing a mortgage from your local lender), the bank will only provide you a loan on the home based on what the bank deems the value of the home to be, otherwise known as the Appraised Value of the home.

Example:

  • A home is listed for $350,000, an appraiser appraises the home based on the area comps that have sold in the last six months and deems that based on the data the home is valued at $355,000.
  • On the flip side, a home is listed for $600,000 but when an appraiser reviews the home and the comps in the area, they find that the home is overpriced and is only valued at $590,000.

 

So - now that we know what an appraised value is, let us explain Appraisal Gap Coverage.

Simply put, this is the difference that you (the buyer) are willing to pay out of your own pocket in order to cover the difference between the appraised value (what an appraiser deemed the value of the home to be) and the price you offered to purchase the home for. Say what?

Let’s bring it back to our example of the home listed for $400,000:

The home is listed for $400,000, but you’ve agreed to pay $415,000 for the home → You’ve agreed to pay $15,000 more than is requested for the home.

The appraiser visits the home and studies the area comps and determines that this house is only valued at $410,000, and therefore the bank will only provide a loan on that value - leaving $5,000 as your responsibility out of pocket. That is the GAP in the appraisal value that you agreed to pay with your Appraisal Gap Coverage.

Appraisal Gap Coverage is a great way to increase the appeal of your offer in a competitive offer situation. Have questions? We're always here to chat. 


 

Spring Market Update

This market is no joke, but be caught feeling uninformed! 

This market is no joke, but be caught feeling uninformed! 

We are officially in the craziest time of the year for Denver Real Estate. While we hear all the time the market is crazy, what does that really mean? It means quite different realities for buyers and sellers so we will look at it from both viewpoints. But first, let's talk market stats.

Summer used to be the "crazy" season for Denver Real Estate but over the past 6 years, spring has claimed that title with no questions asked. Since the New Year, buyers have been out in full force trying to find that perfect home before summer hits. Who wouldn’t want to have all summer to get settled and enjoy a new yard for entertaining?

Sellers, on the other hand, typically aren't crazy about selling until school is out and the weather is better.

So what we are left with now is an incredibly pent up demand for home inventory which explains why homes are increasing in value 2-3% a month. There are currently around 4,000 homes for sale in the Metro area, a population of almost 3 million people. The supply demand equation greatly favors sellers right now, thus these quickly escalating prices.  

If you are thinking of selling, I can't say this strongly enough, NOW is the time to sell. If you want to get the highest price with the strongest offers, April to early June is the time for that. There is no better time during the year to sell, period. Why? The buyer’s are out in droves, and when you have the only dangling carrot available, you bet you will get paid top dollar in return.

Now, I know this doesn't always fit your plans though so let's talk about the next best times because timing can be everything.

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To you buyers who are out shopping right now, be strong and don't give up hope. I won't lie and say it's easy, but I will say that it’s not impossible because we have buyers who are closing on homes every week. It does take a strong game plan, however,  and a very knowledgeable agent who can guide you through the process.

So why wouldn’t you just wait until the market cools down a bit you ask?  While it seems like it would be easier to just wait until that magical unicorn day comes, you need to keep this in mind: if you don’t buy now, you will likely see another 4-6% in appreciation in May and June alone, and you that could diminish some of your buying power. If you choose to capitalize and purchase on that same notion,  that is some pretty amazing equity to be walking into on your new home. Oh, and did I mention interest rates are expected to rise an additional 3 times this year? Time is of the essence.

I get it though, your dream home just didn’t fall in your lap this spring, don't despair. July and August are great times to buy and many would argue the best time to buy. For whatever reason, buyers disappear once fireworks start flying, and those on-the-fence sellers finally decide to sell. We see some of the greatest inventory in July and August along with some of the lowest demand. Don't go thinking you're going to get a house for nothing, but instead of 20 offers to compete with, there might be one or two.

The lesson here is for buyers who plan to buy in the next 12 months. I urge you to really focus on July through September as your prime shopping moment. You will get some of the lowest prices of the year along with greatest inventory. If you are in a lease until next spring, weigh the cost benefits of breaking the lease and buying during this time. By the time your lease is up, prices could be an additional $50K higher and unless you're renting the entire Four Seasons, I can guarantee your lease would cost less to break than that.

If our team can be any help to you in making those decisions, we’d love to hear from you!