Everything Buyers & Sellers Need to Know About Appraisal Gaps

Mind the appraisal gap

Before we jump into what an appraisal gap is, let’s briefly review what an appraisal is and the role it plays in a real estate transaction.

Whenever a person uses a loan to purchase a property the lender will require that an appraiser conduct a thorough review of the property and offer their opinion of the value.

There are three different methods an appraiser can use to determine the value.

These methods include:

  • The Sales Comparison Approach
  • Income Producing Approach
  • Replacement Cost Approach

What is a Real Estate Appraisal Gap?

Home appraisers finding the value of a propertyOnce the real estate appraisal is complete, the appraisal report is sent to the lender and then to the underwriting team overseeing that particular loan.

The underwriting team checks to ensure there is nothing obscure within the report and that the value is equal to or more than the amount the buyer is borrowing. Real estate appraisal gaps occur the loan amount a buyer is borrowing is more than the appraised value of the home.

If there are no appraisal gaps,  then the underwriting is approved and the loan continues to move towards the three words every buyer and realtor wants to hear, “Clear to Close!”

What Happens When an Appraisal Returns Too Low?

If there are issues that arise within the report that need further clarification, the appraiser will likely work with the realtors involved in the transaction to remedy any issue.

If an appraisal gap does transpire and the value of the property after an appraisal is lower than the amount being borrowed, underwriting and loans will not necessarily get approved.

Home appraisal magnifying their report to find an appraisal gapThis can be a very unfortunate experience for all parties involved, however, that does not mean the deal is dead.

In the past, the seller would often reduce the sales price to the appraised value or the seller would get to work on some weekend projects to boost home resale value.

This trend started changing as more and more cash buyers entered the market. When a buyer uses cash for the purchase an appraisal is not required.

With the supply extremely low and demand at an all-time high, sellers in today’s housing market can be very picky.

Unfortunately for buyers needing a loan for the purchase, this trend made it nearly impossible to beat out an all-cash offer.

The Appraisal Gap Addendum

Magnifying glass over autumn colored trees and a trail.Then something amazing entered the scene and evened the playing field between cash buyers and loan buyers The Appraisal Gap Addendum!

In order to be competitive in the current market, most properties will receive offers over the asking price, especially if a bidding war occurs.

This was somewhat of a concern for sellers that chose a buyer using a loan because if the house didn’t appraise to the value being offered, then they would likely reduce the price and make less money or the deal would terminate.

Neither option was appealing, hence why so many cash offers beat out loan offers.

Now, buyers using a loan can submit their offer with an Appraisal Gap Addendum. This attorney-drafted document states that in the event that the appraised value is lower than the purchase price, they are contractually obligated to use their own funds to fill in the gap, up to a certain amount.

Covering the Gap

The amount that they will fill the gap is dependent on the amount of available funds and how far off the purchase price and appraised value will likely be.

The real estate agent should be able to advise on that amount based on their knowledge of the market and reliable comps.

Speaking from my own experience, this tool has helped countless buyers, using a loan, win in multiple offer situations

About the Author

A Realtor® in Boone and the High Country since 2003, I am passionate about offering my clientele superior service, innovative marketing, and a highly personalized, boutique-style experience. Upon moving to Boone, I started my real estate career as an Investor and was Broker-In-Charge of my own firm. Since then, I have excelled with other real estate firms and built a strong network of client friends. Together with my network of real estate-related professionals, along with my Professional Home Staging business, we will polish your home buying/selling experience with your goals as a priority. 

I’ve lived all over the United States from the NE to the SE and California before landing in Boone, NC. You’ve seen the signs, “The mountains are calling, and I must go?” Well, that was me 21 years ago! I love bluegrass music and, it seems, many of the great pickers were born in NC with a guitar in their hands! I sing, play a little mandolin and keyboards, and can be found at outdoor festivals and concerts when I’m not showing property! I also participate in many of our area’s outdoor activities, from hiking and biking to kayaking- the New River is my summer home! Caring for the needs of High Country residents is also very important to me. I serve in many ways, from preparing and serving meals at the Hospitality House to School Events to Habitat for Humanity Home Builds. In addition, I am honored to serve our community as a Licensed Foster Parent and Certified Guardian ad Litem, advocating for children in the courtroom.

The High Country of North Carolina is unique, with sizeable second home and student populations driving much of the market. It’s important that you work with a Realtor® like myself who is experienced and educated in the area, guaranteeing our success together. The acronyms behind my Broker title are not just letters - they stand for something;

 GRI - Graduate of the Realtor Institute. Brokers holding this designation have completed 12 3-day courses over 2 years or more for in-depth training.

 ABR - Accredited Buyer's Agent. An (ABR®) designation means your Realtor® has made extra efforts to raise the bar with additional courses and proven experience in serving BUYERS.

 SFR - Short Sales and Foreclosure Resource Certification. Short sales and foreclosures are not for the faint of heart, and the courses I've taken arm me with the knowledge to assist clients in this area.

My business approach is founded on building lasting relationships based on commitment and trust, and much of my business comes from referrals from past clients. 

Make me Your Realtor of Choice, and work with someone you can trust to take your needs to heart and find the perfect property for YOU in the HIGH COUNTRY!