Helping people buy a home is always a challenge, but it becomes especially difficult when there isn’t much inventory on the market. When properties sell quickly and there isn’t enough inventory to meet demand, buyers may need to make more aggressive offers and make more compromises about the location of the home or the amenities that they expect.
When your buyer increases the price they offer on a property to exceed the asking price, they run the risk of an appraisal gap. The listing price likely reflects the likely price an appraisal will return.
If the price goes well over asking, the appraiser may determine that the property is worth less than the sale price. The appraisal gap that results can quickly complicate what would otherwise be a straightforward transaction.
Appraisal gaps can be an issue for some buyers
If you have a buyer coming to the table with a significant down payment, such as two decades of equity from their prior home, then a significant appraisal gap will not be a massive concern. They will have the resources to cover enough of the purchase price themselves.
However, if the buyer intends to finance most or all of the purchase price, an appraisal gap could mean that the lender won’t approve the transaction. It’s important that buyers know about the risk involved when making a high offer that an appraisal may not support and that they have the appropriate contractual protections in place so that they are penalized if they cannot follow through with a purchase because of a low appraisal.
Monitoring the market to better advise your client will help you get them to the closing table with fewer complications and risks.