What Is An Appraisal Gap?

There’s no question that we have found ourselves in one of the hottest and most competitive real estate markets in recent memory. Demand has been outperforming supply for months, driving up home prices as buyers clamor to break into the market. 

It has been a simple economics principle: supply versus demand. With a low supply of homes and increasing demand, home prices have continued to trend upward. But even if a buyer is willing to pay a particular price for a home, it does not necessarily mean the home will appraise for that price. 

And here we have what is known as an appraisal gap, where home prices are going under contract at historic rates (with buyers willing to purchase), yet appraisals are coming in below the contract price on the house. So, what happens in this situation? 

An appraiser’s job is to analyze a home’s fair market value objectively, and they do this by studying the facts of the property. It’s their job to remain unbiased to both the buyer and seller, only giving the home’s worth given current market conditions. This helps protect lenders, so they are not lending more money than the home is worth.

But in today’s real estate market, it’s pretty common to see the number of appraisal gaps trending upward. So for buyers and sellers, it’s good to be aware of this potential issue while you are entering into a real estate transaction on either side.

For sellers, you may have a certain number in mind and expect your home to close at that price. But if the appraisal does not come back reflective of that number, you may need to go a different route. Because today’s market favors the seller, one common practice is to ask the buyers to make up the price difference. 

That means that, as a buyer, you should be prepared to potentially come up with more money if this is a home you can’t live without. Remember how competitive the market has been. If you say no to the seller, there could be a long line of backup buyers behind you who are willing to agree to these terms.

Your best course of action if you encounter an appraisal gap is to work with your real estate agent. They will go over the different options given your scenario and advise you accordingly. Plus, there could be additional negotiations that need to take place in this instance, and your real estate agent will be a tremendous asset in that case.

Melody Smith & Associates is a longtime leading broker associate in South Orange County, known for super service, and is in the top 1% of 1% of agents in the country. Please contact us for all of your real estate needs.