What To Do When Theres An Appraisal Gap

Dated: June 29 2021

Views: 1026

What To Do When There's an Appraisal Gap on the Home You're Buying

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In today’s Tampa Bay real estate market, low housing inventory and high demand are driving up home prices. As many as 54% of homes are getting offers over the listing price, based on the latest Realtors Confidence Index from the National Association of Realtors (NAR). Shawn Telford, Chief Appraiser at CoreLogic, elaborates:

“The frequency of buyers being willing to pay more than the market data supports is increasing.”

While this is great news for home sellers, it can be tricky for buyers to navigate if the price of your contract doesn’t match up with the appraisal value for the house. It’s called an appraisal gap, and it’s happening more in today’s market than the norm.

According to recent data from CoreLogic19% of homes (that's 1 out of 5) had their appraisal value come in below the contract price in April of this year. That’s more than double the percentage in each of the two previous Aprils.

The chart below uses the latest insights from NAR’s Realtors Confidence Index to showcase how often an issue with an appraisal slowed or stalled the momentum of a house sale in May 2021 compared to May of last year.What To Expect as Appraisal Gaps Grow | MyKCMWhen an appraisal comes in below the contract price, the lender won’t loan the buyer more than the agreed upon percentage of the home's appraised value (for a conventional loan, this is usually 80% of the home's value, but it can vary depending on the loan program you have). That means there’s going to be a "gap" between the amount of the loan the buyer can secure and the contract price on the house. 

For example, if a home is contracted for $500,000 and the borrower can finance 80% of the value with a conventional loan, they would expect the loan to be $400,000. The borrower would need to plan on bringing $100,000 of the purchase price to the closing table (plus closing costs). However, if the appraisal comes in at $450,000, instead of the contracted price of $500,000, the lender will then only finance 80% of the $450,000. In this scenario, the max loan amount would now be $360,000. Since the contract price is $500,000, the buyer would now need to bring $140,000 to closing vs the original $100,000 they planned on.

While it's true that sellers sometimes are willing to work with buyers on appraisal gap issues, this is becoming less and less common in this hot housing market. The reason for this is that 1 out of 3 buyers in the Tampa Bay area are buying homes with cash at full price or above and sellers know they often don't have to negotiate appraisal values with cash buyers. There are also many buyers in our housing market that are willing to make up the difference in cash from an appraisal gap and sellers are taking full advantage of offers that waive appraisal contingencies. That’s why it’s common in today's market for sellers to ask the buyer to make up the difference themselves in today’s competitive housing market.

If you're buying a home and it under-appraises, you'll need to be prepared to act quickly. If you have a loan or appraisal contingency that let's you walk away from the contract and get your escrow deposit back, that's one option...but if you really love the home, you'll need to speak with your Realtor to see if the sellers are willing to negotiate around the difference or you need to be prepared to bring more cash to the closing table. The options can vary from buyer to buyer depending on the circumstances, so we always recommend speaking with your Realtor about the best strategy for your situation.

Bottom Line

Whether you’re buying or selling a home, let’s connect so you have an ally throughout the process to help you navigate the unexpected twists and turns that can occur during a real estate transaction, including appraisal gaps.

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Andrea Hartmann

Andrea is the Managing Partner of The Sandy Hartmann Group and runs the team alongside Sandy Hartmann. She would love to talk to you about real estate! Andrea was born and raised in the Tampa Bay a....

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