Someone who is trying to purchase a home may end up competing with other buyers, as the best properties tend to command high prices and can even result in bidding wars. Buyers who have located what they think would be the perfect property for their family will often make an assertive offer that represents the maximum amount they could pay.
Unfortunately, sometimes buyers who make assertive offers end up entangled in a frustrating scenario involving an appraisal gap, which could potentially cancel their closing altogether.
What is an appraisal gap?
Lenders expect those wanting to finance a property to offer a reasonable amount for its purchase based on the condition of the property and the fair market value for similar homes. Unfortunately, what someone offers and what an appraiser believes the property is worth may not align.
If the appraiser sets a price that is below the amount that someone offered for the property, the lender may limit what they will finance for the purchase based on the appraisal, leaving someone with a large appraisal gap that could amount to tens of thousands of dollars.
How do people handle an appraisal gap?
There are numerous possible solutions for when the appraised property’s value does not meet the price offered for a piece of residential real estate. If someone has their own resources that they can bring to the table, that may be the simplest solution for an appraisal gap. They can pay in cash to cover the difference between what they offered for the property and what the appraiser says it is worth.
Other times, hopeful buyers might try applying for a mortgage with a different company. They may hope that the market will improve in the next few weeks or that a different appraiser will assess the property at a higher value. In some cases, buyers may be able to negotiate with the seller when the appraiser determines that the property isn’t worth the amount offered. In some cases, prospective buyers may need to walk away from a transaction.
People can protect themselves from an appraisal gap
There are two ways to address an appraisal gap before it occurs. The first is to be very careful to monitor the local market and to not offer an unreasonably high amount for a property when there is a mortgage involved. The second involves including an appraisal contingency in the offer so that if the appraisal comes in low, at least the earnest money extended when making the offer won’t be at risk.
Actively protecting against an appraisal gap by working with a professional can help those who are preparing for a residential real estate transaction in the Saratoga Springs area.