If you’re selling your home in a hot market where home prices are being driven up by bidding wars, your home may not appraise for the inflated purchase offer. Here’s a guide to help you understand what happens when homes appraise below the purchase price.
How is the appraised value determined?
Most buyers finance the purchase with a mortgage. Mortgage lenders typically require an appraisal to determine the value of a home. This helps ensure that the mortgage company doesn’t lend more than the property is worth.
A professional appraiser will determine the value of the property based on the size & condition of the home, upgrades or improvements, and the final sales price of comparable properties in your area.
What is an appraisal gap?
This is the difference between the purchase offere and the appraisal value. If the home appraises high (meaning above the asking price), the gap is in the buyer’s favor. If the home appraises low (below the purchase price), the buyer will have difficulty securing a loan for the property without bringing extra cash to the sale (or renegotiating the price).
What causes appraisal gaps?
There are many reasons for appraisal gaps, like:
- Poorly maintained home or property
- Your home is overpriced
- In a hot market, values rise faster than recent sales for comparable properties in the area.
- Inventory shortages
- Local property values are beginning to decline
What happens if a home appraises low?
If a home appraises for less than the purchase price, there are several things that can happen:
- The buyer may pay the difference.
- The buyer or seller can requiest a reconsideration of value.
- The buyer may apply with a different lender.
- The buyer & seller can renegotiate the purchase price.
- The buyer may walk away from the sale.
What’s the difference between an appraisal gap guarantee and an appraisal contingency waiver?
When the purchase offer is more than the value of your home, you need assurance that the sale will go through. Buyers can offer this assurance with an appraisal gap guarantee or by waiving the appraisal contingency clause in the offer.
An appraisal contingency states that the offer is conditional on the property appraising for the amount of the purchase offer or more. This protects buyers and their lender from paying more than the home is worth. Buyers who are paying cash can waive the appraisal contingency, but buyers who are financing the purchase generally cannot (unless they have cash to cover the appraisal gap and down payment).
An appraisal gap guarantee is a promise from the buyer to the seller to pay the difference between the sales price and a low appraisal (typically up to a certain dollar amount). These are most common in seller’s markets. This is because sellers are setting higher asking prices and buyers are offering more than the asking price – meaning that the home is unlikely to appraise for this value as a result. There are two things to know about appraisal gap guarantees:
- Most appraisal gap guarantees have limits. Buyers can add a cap to an AGG that indicates how large of a gap they’re willing to cover.
- Buyers should prove that they can cover the gap. Buyers should present you with a pre-approval letter with their purchase offer, but they should also present you with proof of additional funds to cover the amount of the promise.
Work with a local agent
Housing markets can be tricky, so it’s important to work with a trusted local agent. Team Melton has over 50 combined years of real estate experience to assist you through every step of the process. Contact us today to get started on selling your home!