What Should I Do About an Appraisal Gap?

What Should I Do About an Appraisal Gap?Buying a home in Portland means working with a competitive and dynamic real estate market, and sometimes you won't have a smooth purchase process. While some of our clients simply make an offer, have it accepted, inspect the property, and then close, it's not always this simple. 

Sometimes you'll end up with an appraisal gap. The great news is that this hiccup can often be leveraged to your advantage, and with the right real estate team on your side you can make sure you're buying a home with confidence in your investment. Here's what you need to know. 

What is an appraisal gap?

An appraisal gap occurs when the appraised value of a property is lower than the agreed-upon purchase price. This situation can complicate financing and negotiations because your lender will need to see that the value of the property is equivalent to the loan amount. 

For example, if you offered $600,000 and it was accepted, but the appraisal says the property is only worth $575,000, you have a $25,000 appraisal gap. Your lender is not going to be willing to take on that extra $25,000 of risk, so you have to find a way to cover the gap or lower the price to reflect the appraised value.

What causes an appraisal gap?

There are any number of causes of an appraisal gap, but generally it is connected to one of these factors:

  • Rapid Market Changes: In a hot real estate market, home prices can rise quickly, sometimes outpacing appraised values based on past sales.
  • Unique Properties: Homes with unique features or custom upgrades may appraise lower if there are no comparable properties in the area.
  • Appraiser Subjectivity: Different appraisers may have varying opinions on a property’s value, leading to discrepancies.

What can I do if there is an appraisal gap?

You have a few options if there is an appraisal gap. The good news is, an appraisal gap can sometimes work to your advantage. Real estate expert Greg Smith with Boulder Home Source explained why an appraisal gap can be a good thing:

"An appraisal gap can be a good thing because it often highlights a rapidly appreciating market, signaling strong future investment potential. It also provides an opportunity for buyers to negotiate better terms and ensures that they aren't overpaying for a property."

There are basically four things you can do in response to an appraisal gap:

  1. Renegotiate the purchase price or terms. This approach is often successful in balanced or buyer’s markets. We can negotiate for a price that reflects the appraisal, ask to split the difference with the seller, or look for other ways to offset the expense like asking the seller to cover some of your closing costs.
  2. Increase your down payment. Your lender will likely be fine with you increasing your down payment by the amount of the appraisal gap, allowing you to move forward as planned. If you don't personally have the funds for this, talk to your lender about using gift funds from a family member if possible. 
  3. Walk away from the purchase (assuming you've included an appraisal contingency, which is common among our clients). If it's really not working, we can move on and find an investment you can make with confidence.
  4. Ask for a new appraisal. Sometimes we can guess that the appraisal gap would not have been present with a different appraiser or by allowing the appraiser to get new and updated information. We can request a review from the same appraiser or sometimes a second appraisal from a different professional.

Can a seller back out if there is an appraisal gap?

One concern some buyers have is whether the seller can back out if they aren't going to get the price they expected. After all, it makes sense that a seller might not want to go through with the transaction if they are going to have to negotiate a lower price or some other concession.

In some rare cases a seller with include a contingency that allows them to back out if there is an appraisal gap, but this is something we hardly ever see. Otherwise, in order for the seller to back out the buyer would have to commit fraud or breach the contract in some way. In most normal circumstances, the seller cannot back out because of an appraisal gap. 

We will work on your behalf to find a solution that works for you in light of the appraisal gap, whether it's finding a new agreement or using your appraisal contingency to back out and continue your search elsewhere without penalty. 

Ready to find your home for sale in Portland? Contact us any time. 

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