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What Buyers and Sellers Need To Know About the Appraisal Gap

What Buyers and Sellers Need To Know About the Appraisal Gap

It’s economy 101 – when supply is low and demand is high, prices naturally rise. That’s what’s happening in today’s housing market. Home prices are appreciating at near-historic rates, and that’s creating some challenges when it comes to home appraisals.

In recent months, it’s become increasingly common for an appraisal to come in below the contract price on the house. Shawn Telford, Chief Appraiser for CoreLogic, explains it like this:

Recently, we observed buyers paying prices above listing price and higher than the market data available to appraisers can support. This difference is known as ‘the appraisal gap . . . .’”

Why does an appraisal gap happen?

Basically, with the heightened buyer demand, purchasers are often willing to pay over asking to secure the home of their dreams. If you’ve ever toured a house you’ve fallen in love with, you understand. Once you start to picture yourself and your furniture in the rooms, you want to do everything you can to land the property, including putting in a high offer to try to beat out other would-be buyers.

When the appraiser comes in, they look at things a bit more objectively. Their job is to assess the inherent value of the home, so they’re going to study the facts. Dustin Harris, Appraiser Coach, drives this point home:

It’s important for everyone to understand that the appraiser’s job in the end is to remain that unbiased third party, to truly tell the client what that home is worth in the current market, regardless of what decisions have been made on the price side of things.”

In simple terms, while homebuyers may be willing to pay more, appraisers are there to assess the market value of the home. Their goal is to make sure the lender isn’t loaning more money than the home is worth. It’s objective, rather than emotional.

In a highly competitive market like today’s, having a discrepancy between the two numbers isn’t unusual. Here’s a look at the increasing rate of appraisal gaps, according to data from  CoreLogic (see graph below):What Buyers and Sellers Need To Know About the Appraisal Gap | Keeping Current Matters

What does this mean for you?

Ultimately, knowledge is power. The best thing you can do is understand an appraisal gap may impact your transaction if you’re buying or selling. If you do encounter an appraisal below your contract price, know that in today’s sellers’ market, the most common approach is for the seller to ask the buyer to make up the difference in price. Buyers, be prepared to bring extra money to the table if you really want the home.

Above all else, lean on your real estate agent. Whether you’re a buyer or seller, your trusted advisor is your ally if you come up against an appraisal gap. We’ll help you understand your options and handle any additional negotiations that need to happen.

Bottom Line

In today’s real estate market, it’s important to stay informed on the latest trends. Work with a real estate professional to help you navigate an appraisal gap to get the best possible outcome.

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4 replies
  1. Ashley Sison
    Ashley Sison says:

    In many places across the USA, buyers are finding that they aren’t the only ones eager to get the keys to their dream home. Most buyers know that there are several ways that the homebuying journey can become more complicated in a competitive market.

  2. Aaron Gray
    Aaron Gray says:

    Things seem to be cooling down a bit, the frenzy of buyers is letting up. However, this is not to say that the market has shifted towards buyers. We still need an influx of properties to sell. I only had one property sell over the listing price, since there was no appraisal contingency and inspections were waived, I am not sure of the actual gap if there was one. The contract price was $30,000 over so I am certain there was a gap.

  3. Bob Cross
    Bob Cross says:

    Although the appraisal protects the lender, as a listing agent and a seller the buyer must understand that the appraisal does not set sale price. If a lower appraisal occurs the seller is not obligated nor dictated to reduce the sale price. In today’s market or any other market.

  4. April Benton Tischer
    April Benton Tischer says:

    Savvy Realtors will ensure that they provide the appraiser with a list of all upgrades and special features of the home. It also helps if receipts are available to show the cost of recent
    upgrades. If multiple offers have come in with prices similar to or above the offer that was accepted, redacted copies of the offers will also provide support for the value of the home. I recently sold a home for $35,500 above the nearest comp in the neighborhood. By providing the information outlined above, the appraiser came within $10,000 of the offer. Fortunately, the buyers were prepared to bridge and the transaction went through without a hitch. Had I not provided the supplemental information and copies of the redacted offers, it is likely that the appraisal would have been at least $30,000 short based on comps alone. The value of a home is, in large part, what the market values the worth of the home to be. If a client receives multiple offers above the asking price, most appraisers in my area will allow redacted offers to weigh heavily in their valuation of the property.


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