Appraisal Gap: The Good, The Bad, and Everything in Between
The basics of the economy: when supplies are low and demand is high, things are priced on the high end. As a real estate agent in the Boston area for the past 10 years. We have to suggest prices just below the market price, competitive enough to capture the attention of home buyers. The market price is what homes sold in the same community, similar footage, location, and amenities for the past 6 months. For the last 18 months, it has been a seller’s market. I’ve seen bidding wars left and right, over 15 bids on a single weekend. Homes are sold over 10% to 15% higher than the asking price. Properties go off the market a week after it was listed. The bidding wars cause the value of the home to be much higher compared to the appraised value. The difference between the offered price vs. appraised value is called the “appraisal gap.” For example, the contracted sale is $800,000 and the appraised value is $775,000. The $25,000 price difference is called the appraisal gap.
The buyer is preapproved for $775,000 loans. When a property is hot and there are more than ten bidders. Covering the appraisal gap is a great way to win over multiple offers. If the client has to win the house, the buyer needs to cover the $25,000 out of their pocket and the lender won’t cover the cost.
In the different markets, negative equity can produce on the house. If the house won’t appraise, the cash is gone. It may take a long time to recover the cost.