What is an Appraisal Gap and What Can I Do About It?

What is an Appraisal Gap and What Can I Do About it?For a variety of reasons, sometimes you will end up with an appraisal gap when you're buying a home in St. George. While this is a hiccup in the buying process, there are ways to respond to the appraisal gap that allow you to still reach your goals. 

Here's what you need to know to navigate an appraisal gap with confidence. 

What is an appraisal gap?

An appraisal gap at its most simple definition is when the appraised value and the accepted offer are not the same price. In some cases, the home will appraise higher than the offered and accepted price, but that type of appraisal gap is not usually an issue. The type of appraisal gap we're talking about is when the appraisal comes back showing that the home is not worth as much as the agreed upon purchase price.

What causes an apprasial gap?

Several factors can contribute to an appraisal gap:

  • Rapid market change: Rapid changes in market conditions can lead to discrepancies between the sale prices and appraised values, as appraisals often rely on past sales data that may not reflect current market trends. St. George has experienced substantial growth and increased demand for housing, so it's unsurprising that this can happen here from time to time. 
  • Bidding wars: In competitive markets like St. George, buyers sometimes bid above the asking price to secure a property. In some cases, this is a good strategy, but this can sometimes lead to agreed purchase prices that exceed recent comparable sales, resulting in appraisal gaps.
  • Unique property features: Homes with unique or high-end features might not have comparable sales data to support their higher valuation, leading to appraisal gaps. For example, a custom-built home with luxury finishes in St. George might not have many comparable properties, making it difficult for appraisers to justify the purchase price.
  • Appraiser subjectivity: While appraisers follow standardized methods, there is still some level of subjectivity involved. Different appraisers might value the same property differently based on their interpretation of market conditions, property features, and comparable sales.

Why is an appraisal gap a problem?

The problem with an appraisal gap is primarily with financing. Your lender is not going to want to give you a loan for more than the property is worth, so if it appraises lower than expected you may need to make a higher down payment to still qualify for the loan. In some cases, the appraisal gap may also be a problem because it makes you wonder if you're overpaying. 

The great news is, we can often leverage your appraisal gap for your benefit. Devin Stephens with Canmore Real Estate Group explains it this way:

"When faced with an appraisal gap, leverage it to your advantage by negotiating a lower purchase price or securing seller concessions, such as closing cost assistance or home repairs. This can turn a potential setback into a strategic opportunity to enhance the value of your investment."

What can I do when there is an appraisal gap?

Here's the great news: when you have an appraisal gap, you have options for how to respond. These are some of the things you can do, and we can help you decide what makes the most sense in your circumstance:

Negotiate with the Seller: One of the first steps is to negotiate with the seller to lower the purchase price to match the appraised value. This can be a viable option if the seller is motivated to close the deal quickly.

  • Increase Your Down Payment: If it makes financial sense for you, increasing your down payment can cover the difference between the appraised value and the purchase price. For example, if the gap is $10,000, you might decide to bring an additional $10,000 in cash to the closing table to solve the problem.
  • Seek a Reconsideration of Value: We can help you can request a reconsideration of value from the lender. This process involves providing additional evidence or recent comparable sales that might support a higher appraisal.
  • Obtain a Second Appraisal: In some cases, we might decide to request a second appraisal. This can be especially useful if you believe the first appraisal was flawed or if you have evidence that the property is worth more. However, note that lenders are not always obligated to consider a second appraisal.
  • Bridge Loans: A bridge loan can provide short-term financing to cover the gap. This can be an option if you are confident that the property's value will appreciate, or if you need to close the deal quickly. Make sure to carefully weigh the risks of the additional financing with your lender. 
  • Private Mortgage Insurance (PMI): If you cannot cover the gap with cash, some lenders might allow you to adjust the loan-to-value (LTV) ratio by paying for PMI. This can help you secure the loan despite the appraisal gap, but it will increase your monthly mortgage payments.
  • Walk Away: If the appraisal gap is too large or if none of the above options are viable, you might decide to walk away from the deal. We recommend our clients' purchase agreements include an appraisal contingency that allows them to back out of the contract without penalty if the property does not appraise for the agreed-upon price.

The best thing you can do in the house hunting process is choose a real estate team you can trust. We will help you navigate any appraisal gap or other escrow hiccups to help you reach your goals. Ready to find homes for sale in St. George? Contact us any time. 

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