Negotiating real estate appraisal gaps isn’t the first thing that most people think about when selling their home, but knowing about appraisal gaps and strategies to work through them can save you a lot of money when selling your home.
What is a Real Estate Appraisal Gap?
When you sell your home, you set an asking price. Buyers use this listing price as a gauge for making an offer.
Let’s say a house is listed for $500,000 and a buyer offers $495,000. Most buyers don’t have $495,000 in cash, which means they will need to borrow some of the purchase price from a bank. Banks want to protect their investments so they will order an independent appraisal of the house to make sure it’s work the $495,000 purchase price.
When the appraisal comes back for the house in our example, the appraiser says it’s only worth $475,000. That is $20,000 less than the original offer. That $20,000 difference is called an appraisal gap.
Negotiating a Real Estate Appraisal Gap
Appraisal gaps can happen at any time and anywhere. However, they tend to be more common in hot real estate markets where there are more buyers than available inventory. This leads to bidding wars, which can drive up the price of a house.
Right now, in the Colorado and Washington markets, we’re seeing appraisal gaps in about 15% of transactions, which works out to be about one in every six or seven home sales.
A Real-Life Example
It’s also worth noting that sometimes agents will use appraisal gaps strategically. We saw one example recently with a for sale by owner seller (that became a client). The buyer agent contacted the seller before making an offer, where the seller mentioned they were moving out of state.
The buying agent used this information to put their client in the best possible position. The strategy the buyer used was to offer way over asking price, to the tune of ~$100,000 over asking. The caveat was that the appraisal would be done on the last day for objections and if there was an appraisal gap, then the price would be adjusted to that price.
Now, it’s important to note that there is nothing wrong with this strategy. However, it did put the seller in a tight spot, potentially. While the initial offer was obviously exciting, we didn’t want them to be disappointed if the appraisal gap reduced the sale price to the asking price, or possibly even less.
The seller opted to pass on that deal and BlueMatch ultimately helped them sell their home for over asking price.
Saving Money When Selling Your Home
As you can see, a real estate appraisal gap can be a strategic tool in contract negotiations. But knowing how to deal with an appraisal gap ahead of time can save you a lot of stress down the line.
Here are a few strategies you can consider that might just make your home sale go smoother and be less stressful.
One unwritten rule of thumb when encountering an appraisal gap is to split the difference between the buyer and the seller. So, let’s say a house goes under contract for $500,000, but the appraisal comes back as $460,000. That’s an appraisal gap of $40,000. Typically, what happens in this case, assuming both parties can agree, is the seller lowers the price to $480,000, so they end up taking a $20,000 hit, while the seller ends up paying $20,000 more.
It’s important to note that a buyer’s willingness to cover an appraisal gap will often depend on how much cash they have available. In this example, the buyer needs $20,000 cash to cover the appraisal gap because the bank will only fund up to $460,000.
Another possibility for dealing with an appraisal gap is to appeal to the agent to reduce their commission. You might be surprised at an agent’s willingness to give up some of their stake in the deal to ensure that the sale closes. After all, if it doesn’t close they don’t get anything. In this situation, the appraisal gap is split between the seller, the buyer, and any agents involved in the transaction, who agree to these terms.
It’s also important to remember that every contract is different and as a seller, you should consider the entire offer, not just the offer with the higher offer price. If a seller has a house on the market for $500,000 and get one offer for $510,000 with no appraisal gap guarantee, and a second offer for $505,000, but this offer includes an appraisal gap guarantee it’s worth crunching the numbers on both. The lower offer may actually end up being stronger and ultimately net you more money on the sale of your home.
Remember, you can write appraisal gap guarantees into contracts as well, and may want to try to get a seller who doesn’t offer a guarantee, to agree to one before going under contract.
If you have any questions about negotiating real estate appraisal gaps, feel free to contact us and we’d be happy to talk with you.