Finding out that your dream home’s value is lower than the contract price can be a major roadblock, but it doesn’t have to be a deal-breaker. This appraisal gap guide explores why these discrepancies happen and how both buyers and sellers can navigate the shortfall.
What is an appraisal gap?
First and foremost, we must understand what an appraisal gap is. An appraisal gap occurs when a professional appraiser values a home below the price agreed upon in the purchase contract.
Since lenders typically base the loan amount on the appraised value rather than the sale price, this discrepancy creates a financial “gap” that must be addressed to complete the mortgage process.
Why a low appraisal can happen
A low appraisal can occur when a rapidly appreciating market causes sales prices to outpace the data available to appraisers. Challenges also arise when there are no recent comparable sales in the area or when the property’s condition shows significant maintenance issues that lower its value.
Furthermore, over-improving a home relative to its neighborhood or a simple appraiser error can result in a valuation that falls short of the agreed-upon contract price.
Buyer options
If an appraisal comes in low, buyers can attempt to renegotiate the purchase price with the seller or cover the financial gap by paying the difference in cash. Most contracts include an appraisal contingency, allowing buyers to back out of the deal if the parties cannot reach an appraisal agreement.
While less common, buyers can also challenge the valuation by disputing inaccuracies in the report or by requesting a second appraisal.
Seller options
Sellers facing a low appraisal can choose to lower their asking price to match the valuation, which is often the fastest way to keep a deal on track. Alternatively, you might work with your agent to challenge the report or address specific condition issues through repairs before requesting a new appraisal.
Sellers can also opt to wait for a new buyer—though this carries the risk of the property sitting on the market longer without a guarantee of a higher future valuation.
Summary
Whether you are a buyer or a seller, understanding this appraisal gap guide can help you navigate the valuation shortfall essential to a successful closing. For personalized guidance through the closing process, contact Ryan Roberts and continue reading our blogs for more Auburn, Opelika and Lake Martin real estate insights.
