Understanding appraisal gaps in the current climate
In the current real estate market, it is not uncommon to hear the term “appraisal gaps” being thrown around. With home prices on the rise and a low inventory of available homes, appraisal gaps have become a common occurrence in many real estate transactions. But what exactly are appraisal gaps and how do they impact both buyers and sellers in the current climate? In this article, we will explore the concept of appraisal gaps and provide a deeper understanding of its implications.
What are Appraisal Gaps?
Simply put, an appraisal gap is the difference between the appraised value of a property and the agreed upon purchase price. For example, if a home is listed for $300,000 and the appraisal comes back at $280,000, there is an appraisal gap of $20,000. This means that the lender will only finance the property up to the appraised value, leaving the buyer to come up with the remaining $20,000 in order to meet the purchase price.
Appraisal gaps are becoming increasingly common in today’s market due to the sharp increase in home prices. With bidding wars and multiple offers on properties, sellers are often able to sell their homes for more than the asking price. However, this doesn’t always align with the appraised value, causing an appraisal gap.
The Impact on Buyers
For buyers, appraisal gaps can be a major obstacle in their home purchasing process. Not only do they have to come up with the additional funds to cover the appraisal gap, but their lender may also require a larger down payment to compensate for the gap. In some cases, buyers may also have to renegotiate the purchase price with the seller or potentially back out of the deal altogether if they are unable to come up with the necessary funds.
Appraisal gaps can also lead to issues with financing. If the gap is too large, the lender may deny the buyer’s loan, leaving them unable to secure the financing needed to purchase the property. This can lead to a long and frustrating search for a new home, which can be a major setback for buyers.
The Impact on Sellers
While appraisal gaps can be a headache for buyers, they also have an impact on sellers. If the appraisal comes in lower than the agreed upon purchase price, the seller may be forced to either lower their asking price or risk the deal falling through. This can be especially difficult for sellers who have already purchased a new home and need the funds from the sale in order to close on it.
In some cases, sellers may find themselves in a tough spot if they have turned down other offers that were closer to the appraised value in order to accept a higher offer. This leaves them with limited options and may result in a lower selling price or having to relist the property.
The Role of Lenders
In the face of appraisal gaps, lenders play a crucial role in determining whether a deal will go through or not. Lenders rely heavily on the appraisal to determine the value of the property and whether it is a sound investment. If the appraisal comes back lower than the purchase price, the lender may not be willing to finance the loan, leaving buyers and sellers with limited options.
However, in a competitive market, lenders may be willing to overlook small appraisal gaps in order to secure the loan, but this is not always the case. Buyers and sellers should be prepared for the possibility of having to negotiate or walk away from a deal if the lender does not approve the loan due to an appraisal gap.
Final Thoughts
In the current climate, understanding appraisal gaps is essential for both buyers and sellers. With home prices on the rise and a limited inventory, appraisal gaps are becoming increasingly common and can have a major impact on the outcome of a real estate transaction. By understanding what appraisal gaps are and being prepared for their potential implications, buyers and sellers can navigate the real estate market with more confidence and avoid any surprises along the way.
