With the competitive housing markets, buyers need to have more than great finances. Even the ideal clients who already know what they want and are eager to act quickly should have a trick or two up their sleeves that come in handy to secure their dream home. Most of the time, this means making an offer that is higher than the property’s purchase price.

What is appraisal gap coverage?

In order to get an offer accepted, buyers may have to go over the asking price. However, when offering above the asking price on a property, there is a great chance that it may be more than what the bank appraises the home for.

Here is an example: Say a home is listed for $100,000 and it goes under contract for a sale price of $110,000. However, the appraisal comes in at only $105,000. Your mortgage lender won’t cover the gap for you. In this scenario, the buyer would have to either fork over an additional $5,000 cash to make the deal happen or convince the seller to accept a new purchase price of $105,000—or walk away from the deal.

Sellers are afraid of the latter option, so if the appraisal comes in short, they like to see a guarantee of an offer over the asking price. Sellers want to be sure that the buyer will come up with some money to cover the difference between the appraisal and the offer.

That is what we called appraisal gap coverage. It is insurance for the seller that the buyer pays an additional amount over the home’s appraised value if by any chance that the appraisal comes in less than the agreed-upon purchase price.

To better the previous example, let’s say the house is listed at $100,000, the buyer offers $110,000 with $1,000 in appraisal gap coverage, and the home appraises for $105,000. The appraisal gap coverage now kicks in, the buyer comes up with $1,000 cash, and the new purchase price is $106,000. The buyer has to pay the seller $1,000 in cash because the lender will not include the appraisal gap coverage in the home loan.

When a seller is looking at two equal offers and one of the offers has appraisal gap coverage, and the other offer doesn’t, they will surely go with the offer with the appraisal gap coverage. On top of it, in this scenario, the buyer gets the house for less than they initially planned on purchasing it for, so it is a win-win!

The home appraisal process

A home appraisal is defined to be an unbiased professional opinion of a home’s value based on recently sold properties nearby. To establish a value on a property, it is conducted by an appraiser who is an independent third party contracted (often by a lender). Which provides another set of eyes on a property and opinion of condition. The appraisal can establish an “as-is” value and a “subject-to” value in the case of rehab.

What are the steps of going through the appraisal process?

1. Third-party appraisal service

The moment that a property is put under contract, the lender will immediately collect payment for the appraisal and order the appraisal through a third-party appraisal service. However, the lender doesn’t get to decide who the appraiser will be.

2. Nearby comps

As the appraisal is scheduled, the seller should be notified when the appraisal will happen to be ready and prepare themselves to put their best foot forward to help achieve a high appraisal value.

The appraiser should also be given a list of three to five “as-is” comps that sold in the area in the last six months. If by any chance, it is a “subject-to” appraisal, include the proposed construction budget and three to five “subject-to” comps that have sold in the last months. It’s the appraiser’s decision whether they may or may not use the information. But, this could help if they are unfamiliar with the area or help them better understand the level of rehab the buyer is looking to do.

3. Contact the lender

Upon the completion of the appraisal, the buyer has to contact their lender to know when the report will be back. If an appraisal objection deadline extension is needed, the buyer should then ask their realtor to get a signed amend and extend agreement so the buyer can protect their earnest money.

4. Review with a Realtor

When the appraisal report comes back, the buyer needs to review it with their real estate agent.

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