{"id":97779,"date":"2021-06-23T09:30:00","date_gmt":"2021-06-23T15:30:00","guid":{"rendered":"https:\/\/www.biggerpockets.com\/renewsblog\/?p=97779"},"modified":"2024-01-15T13:02:31","modified_gmt":"2024-01-15T20:02:31","slug":"appraisal-gap","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/appraisal-gap","title":{"rendered":"What Is Appraisal Gap Coverage?"},"content":{"rendered":"<p><iframe loading=\"lazy\" src=\"https:\/\/playlist.megaphone.fm?e=BIGPOC3642370274&amp;light=false\" width=\"100%\" height=\"200\" frameborder=\"0\" scrolling=\"no\"><\/iframe><\/p>\r\n\r\n<p>&nbsp;<\/p>\r\n<p><span data-preserver-spaces=\"true\">Home buyers that know what they want and are ready to act quickly should know what\u00a0<\/span><strong><span data-preserver-spaces=\"true\">appraisal gap coverage<\/span><\/strong><span data-preserver-spaces=\"true\">\u00a0is if they want to secure their dream home. Often, this means making an offer that is higher than the property\u2019s purchase price and may even be more than the home&#8217;s appraised value.<\/span><\/p>\r\n<h2><span data-preserver-spaces=\"true\">What Is Appraisal Gap Coverage?<\/span><\/h2>\r\n<p><span data-preserver-spaces=\"true\">To get an offer accepted, home buyers may have to go over the asking price. But when offering above the asking price on a property, it may be more than what the bank appraises the home for.<\/span><\/p>\r\n<p><span data-preserver-spaces=\"true\">For example, say a home is listed for $100,000 and goes under contract for a sale price of $110,000. However, the appraisal comes in at only $105,000. Your mortgage lender won\u2019t cover the appraisal gap for you. In this scenario, the buyer would have to either fork over an additional $5,000 cash to make the deal happen, convince the seller to accept a new purchase price of $105,000 or walk away from the deal.<\/span><\/p>\r\n<p><span data-preserver-spaces=\"true\">Sellers are afraid of the latter option, so if the appraisal comes in short, they like to see a guaranteed offer over the asking price. Sellers want to be sure that the buyer will come up with some money to cover the difference between the appraisal and the offer.<\/span><\/p>\r\n<p><span data-preserver-spaces=\"true\">That is called appraisal gap coverage. It is insurance for the seller that the buyer pays an additional amount over the home\u2019s appraised value if the appraisal comes in less than the agreed-upon purchase price.<\/span><\/p>\r\n<p><span data-preserver-spaces=\"true\">To modify the previous example, let\u2019s say the house is listed at $100,000. The buyer offers $110,000 with $1,000 in appraisal gap coverage, and the home appraises for $105,000. The appraisal gap coverage now kicks in, the buyer comes up with $1,000 cash, and the new purchase price is $106,000. The buyer has to pay the seller $1,000 in cash because the lender will not include the appraisal gap coverage in the home loan.<\/span><\/p>\r\n<p><span data-preserver-spaces=\"true\">If a seller is looking at two equal offers and one offer has appraisal gap coverage, but the other offer doesn\u2019t, they will accept the appraisal gap coverage offer. Plus, in this scenario, the buyer gets the house for less than they initially planned on purchasing it for, so it is a win-win!<\/span><\/p>\r\n<h2><span data-preserver-spaces=\"true\">When Is Appraisal Gap Coverage Necessary?<\/span><\/h2>\r\n<p><span data-preserver-spaces=\"true\">In a market where buyers outnumber sellers, offers can get crazy. This is a problem for a seller because they might take the best offer only to have the property appraisal back well under the sales price.<\/span><\/p>\r\n<p><span data-preserver-spaces=\"true\">If this happens, the buyer and seller both have to agree on what the home price will be and\/or who will pay for the difference between the offer price and the appraisal. So, a seller should include an appraisal gap guarantee clause in the contract so they can feel confident taking the highest offer even if they are worried the appraisal won\u2019t support it.<\/span><\/p>\r\n<h2><span data-preserver-spaces=\"true\">Dealing With an Appraisal Gap<\/span><\/h2>\r\n<p><span data-preserver-spaces=\"true\">Appraisal gaps are common in a seller\u2019s market, but there are a couple of ways to deal with this issue. Either the buyer or the seller can request a review of the appraisal. Look over the reasons the\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/home-appraisal-process\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">home appraisal<\/span><\/a><span data-preserver-spaces=\"true\">\u00a0came in lower and decide whether it is actually worth the sales price. Then the buyer and seller can decide between these two options:<\/span><\/p>\r\n<h3><span data-preserver-spaces=\"true\">Pay the difference<\/span><\/h3>\r\n<p><span data-preserver-spaces=\"true\">In really\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/7-tips-offer-accepted-hot-market\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">hot real estate markets<\/span><\/a><span data-preserver-spaces=\"true\">, a buyer may decide that they want to pay cash for the difference between the appraisal and the purchase price. Of course, this means they\u2019ll have to come up with the money on their own to pay this appraisal gap, but they may feel the home is worth it. They might also be willing to pay this difference when other homes are selling quickly, and they\u2019re worried about missing out on the deal.\u00a0<\/span><\/p>\r\n<h3><span data-preserver-spaces=\"true\">Renegotiate<\/span><\/h3>\r\n<p><span data-preserver-spaces=\"true\">The other option for buyers and sellers is to renegotiate the real estate deal. If the appraisal gap is too large or the buyer can\u2019t come up with the funds to cover the difference, it may be worthwhile for both parties to decide on a new purchase price. A seller has to decide how much less they\u2019re willing to take to ensure their\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/leftover-properties-in-hot-market\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">property isn\u2019t leftover<\/span><\/a><span data-preserver-spaces=\"true\">\u00a0even in a hot housing market.<\/span><\/p>\r\n<h2><span data-preserver-spaces=\"true\">How Does Appraisal Gap Coverage Work With an Offer?<\/span><\/h2>\r\n<p><span data-preserver-spaces=\"true\">Appraisal gap coverage makes a buyer\u2019s offer stronger in any market. That said, it is almost always used in a high-demand market, where the buyer needs to incentivize the seller to take their offer.<\/span><\/p>\r\n<p><span data-preserver-spaces=\"true\">For example, let\u2019s say a couple is considering buying a two-bedroom condo in downtown Denver listed for $385,000, with offers pouring in from all sides. They know they need to come in strong with a serious offer. They decide to put in an offer for $415,000 with an appraisal gap coverage of $5,000. Hypothetically, let\u2019s say the place is appraised at $400,000.<\/span><\/p>\r\n<p><span data-preserver-spaces=\"true\">An offer for $415,000 (without appraisal gap coverage) would mean that the lender would only secure the loan for $400,000. There is now a $15,000 difference between what the seller thought they could get and the loan. Now everyone is required to renegotiate. Will they split the $15,000? Will they lose the contract? No one wants this because buying or selling a house requires paperwork, so sellers really do not want to be in this position.<\/span><\/p>\r\n<p><span data-preserver-spaces=\"true\">An offer for $415,000 on a house that appraises for $400,000 with $5,000 in appraisal gap coverage means that the buyer is securing appraisal plus $5,000. So, in this case, if the buyer offered $415,000 and it came back at $400,000, they are guaranteeing they will pay at least $405,000. The offer is stronger because the seller knows they will get the appraisal plus $5,000 even if the market doesn\u2019t support this price.<\/span><\/p>\r\n<p><span data-preserver-spaces=\"true\">A bank loan will not support this sales price, so the buyer needs to make sure they have the cash to cover it. If they offered $5,000 appraisal gap coverage and the appraiser says the property is worth less, the buyer has to come to the closing table with the $5,000 in cash.<\/span><\/p>\r\n<p><span data-preserver-spaces=\"true\">This is a great tool to help an offer stand out in a competitive market, but it should not be confused with an appraisal contingency.<\/span><\/p>\r\n<h2><span data-preserver-spaces=\"true\">Appraisal Gap Coverage vs. Appraisal Contingency<\/span><\/h2>\r\n<p><span data-preserver-spaces=\"true\">An appraisal contingency clause in the real estate contract defines a condition or action that must be met for the sales contract to become binding. Both parties \u2014 the buyer and the seller \u2014 must agree to the terms and sign the sales contract, contingencies included, to make it binding.<\/span><\/p>\r\n<p><span data-preserver-spaces=\"true\">These added clauses enable the\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/rising-interest-rates-challenge-investors\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">investor to acquire property<\/span><\/a><span data-preserver-spaces=\"true\">\u00a0on their terms and provide a way out of the contract if things go south. However, since a real estate contract is binding, buyers must understand how they are used and how to remain competitive when making offers.<\/span><\/p>\r\n<p><span data-preserver-spaces=\"true\">An appraisal contingency clause ensures that the purchase depends on the findings of an appraisal. Typically, the buyer is simply making sure the home is worth what the seller says it is or, hopefully, worth more.<\/span><\/p>\r\n<p><span data-preserver-spaces=\"true\">The contingency basically says either:<\/span><\/p>\r\n<ul>\r\n<li><span data-preserver-spaces=\"true\">The appraisal on the property is at least as high as the purchase price. Otherwise, the buyer can back out of the deal; or<\/span><\/li>\r\n<li><span data-preserver-spaces=\"true\">If the appraisal on the property is lower than the purchase price, the buyer can ask the seller to drop the price, and if the seller refuses, the buyer can back out of the deal.<\/span><\/li>\r\n<\/ul>\r\n<p><span data-preserver-spaces=\"true\">The appraisal contingency often goes hand in hand with the financing contingency, as the lender will not fund the loan above the appraised price.<\/span><\/p>\r\n<p><span data-preserver-spaces=\"true\">One of the\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/escalation-clauses\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">advantages of appraisal gap coverage<\/span><\/a><span data-preserver-spaces=\"true\">\u00a0is that it helps buyers stand out, and it also doubles as a safeguard from potentially overpaying for a property. Either way, it will help increase the likelihood of an offer being accepted and should always be considered when making a real estate purchase.<\/span><\/p>\r\n\r\n\r\n\n    \n  <div id=\"visibility-group-block_c0314b8dc3f1c85074715a8e50192b0e\" class=\"visibility-group alignwide  hidden\">\n        \n\n<div id=\"hero-block_945edda74f104dd8bf9ce30eb2f27f3b\" class=\"first:mt-0 hero-block py-4  alignwide   has-background has-slate-200-background-color has-text-color has-theme-gold-color\">\n    <div\n        class=\"gap-10 lg:gap-20 flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 lg:w-1\/2 \">\n            <main class=\"py-4\">\n                \n\n<p class=\"has-slate-800-color has-text-color has-large-font-size\" style=\"font-style:normal;font-weight:800\">Find the Right Agent, Close the Best Deal<\/p>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-slate-900-color has-text-color\" style=\"font-size:18px\">Step #1: Use Agent Finder to match with top <em><strong>investor-friendly<\/strong><\/em> real estate agents to help you find, analyze, and close your next deal.<\/p>\n\n\n\n<div id=button-custom-event-block_5abb9c48a3847ae81102081640e8f022 class='button-custom-event'>\n      <a\n    href=\"https:\/\/www.biggerpockets.com\/agent\/match\"\n        x-on:click=\"window.analytics.track('Blog Block | B2C Marketplace Agent Finder', {\n      referrer: 'https:\/\/www.biggerpockets.com\/blog\/appraisal-gap',\n    });\"\n    class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\">Find an Agent<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n                <div class=\"lg:w-1\/2 first:mt-0 relative h-full lg:flex lg:items-center\">\n            <img decoding=\"async\" class=\"object-cover w-full relative z-20 my-0  rounded-md hidden lg:block\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/08\/Marketplace-Blog-Blocks-Agent-v3.png\" alt=\"investor friendly real estate agent\" title=\"\">\n        <\/div>\n            <\/div>\n<\/div>\n\n  <\/div>\n  \n\n\n<div class=\"wp-block-group\"><div class=\"wp-block-group__inner-container is-layout-constrained wp-block-group-is-layout-constrained\">\n    \n  <div id=\"visibility-group-block_64dd31c79f00f\" class=\"visibility-group  \">\n        \n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div id=\"hero-block_64dd2875dba9d\" class=\"first:mt-0 hero-block py-4    has-background has-slate-100-background-color has-text-color has-theme-slate-color\">\n    <div\n        class=\" flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 w-full \">\n            <main class=\"py-4\">\n                \n\n<h3 class=\"wp-block-heading my-0 tracking-tight font-extrabold has-theme-slate-dark-color has-text-color has-large-font-size\">Join the community<\/h3>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-theme-slate-color has-text-color\" style=\"font-size:16px;font-style:normal;font-weight:400\">Ready to succeed in real estate investing? 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Often, this means [&hellip;]<\/p>\n","protected":false},"author":281659,"featured_media":146335,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7390],"tags":[],"class_list":["post-97779","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-acquiring-property"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/97779","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/281659"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=97779"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/97779\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/146335"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=97779"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=97779"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=97779"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}