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.