When market prices fluctuate, buyers may unintentionally overvalue properties. An appraisal gap occurs in cases where people hoping to acquire real property offer a sale price higher than the fair market value for the property, as established by a professional.
Appraisal gaps frequently lead to financing issues. Mortgage companies do not want to provide loans for an amount higher than the current fair market value of the property. Doing so could lead to a loss for the company if the buyer defaults.
How can buyers facing an appraisal gap address the issue?
Renegotiating
In many cases, buyers can renegotiate with sellers when an appraisal shows that they initially overvalued the property. Particularly when demand is not high for a specific neighborhood or property, the sellers may agree to adjust the sale price.
Switching lenders
Switching to a different lender generally requires a new appraisal. The second appraisal could be higher than the first, allowing the buyer to move forward with the purchase as planned.
Acquiring alternate funding
Private loans from family members or the liquidation of assets for cash can help buyers cover the gap between the amount they offered and the amount of financing available based on the appraised value of the property.
In cases where buyers cannot overcome an appraisal gap, they may need to cancel the transaction. The terms of the purchase agreement and the initial offer can either protect the buyer or leave them exposed.
Working with a real estate lawyer can reduce the likelihood of costly mistakes, such as the failure to include financing and appraisal contingencies when bidding aggressively on properties. Buyers may need to have a plan ready in case the appraisal comes in lower than they expected during a real estate closing accordingly.