Sometimes real estate transactions fall through before they reach the closing table. After prices surged in recent years, a large number of hopeful buyers have had their dreams destroyed by an appraisal gap.
An appraisal gap occurs when the offered price is higher than the appraised price set by a professional. How can buyers avoid an appraisal gap?
Make realistic offers
Those who qualify for higher mortgage amounts will sometimes offer the maximum amount they can finance on a property without consideration of whether that property is worth that amount. Conferring at length with a real estate agent is often necessary to verify that what someone offers to pay is actually reasonable. Offering a price beyond what other similar properties have sold for recently is likely to put a buyer at risk of an appraisal gap.
Have funding to cover the gap
Lenders will often agree to finance what an appraiser believes the property is worth and nothing more than that. If a buyer can cover the difference between the appraised value of the home and the offer, which could potentially be tens of thousands of dollars, then they can sometimes still move forward with the transaction.
Having sufficient liquid capital available or arranging to borrow money from family members are both ways in which people can preemptively plan to cover the appraisal gap and move forward with the transaction.
Other times, buyers may be able to renegotiate their offer with the seller to better align with the appraisal so that they can complete the transaction. Understanding the risks that come with making a particularly generous offer could help people avoid common pitfalls that keep people from becoming property owners on the current market.