Photo of Pamela T. Karlson and Joy Senn

Advice you need...Care you deserve.

How buyers and sellers protect against the dreaded appraisal gap

On Behalf of | Jun 7, 2022 | Real Estate

Coordinating multiple sets of priorities and considerations is necessary in a typical real estate transaction. Buyers and sellers may have their own timelines, as well as individual priorities for the transaction. There are also the needs of the financial institution financing the transaction to consider.

All of those moving parts are one reason why everything involved with the real estate transaction involves paperwork. When everything is in writing, there will be less opportunity for fraud or honest mistakes. From the initial offer to the final closing, there will be numerous legal documents involved in a residential real estate transaction.

The offer is key because it sets the price and terms for the sale. Sometimes, the price that the buyer and seller agree on is higher than what the appraiser decides the home is worth. The lender may not provide full financing in that scenario. How can buyers or sellers protect against an appraisal gap before one arises?

What sellers can do

Sellers can reduce the likelihood of an appraisal gap by basing their asking price on the current market. The bigger the increase in property values in recent months, the more likely it is that the appraised value for a property may lag behind those sales trends.

Sellers who do not want the closing disrupted or delayed by an appraisal gap may want to give special consideration to cash offers, especially if bidding pushes the purchase price over the asking price.

What buyers can do

There are a couple of ways that buyers can reduce the likelihood of an appraisal gap. They can look at homes that are moderately lower in asking price than their maximum financing amount. They can also set aside larger cash reserves or secondary financing offers to help them cover an appraisal gap if one does occur. Additionally, they can protect themselves from financial losses if there is an appraisal gap by including a financing or appraisal contingency in their offer.

When everyone involved in a real estate transaction is proactive about avoiding complications, the chances are better of reaching the closing table on schedule. Taking the right steps to protect yourself during a real estate transaction means following real estate trends and monitoring the market.