As we know, we’re in the midst of a seller’s market and with more buyers out there than inventory, competition has been absolutely crazy. Homes have been selling for anywhere from $10,000 to $50,000 more than the listed price. And depending on your market, if you’re on the coast it may even be up to $100,000 over list! Which is crazy, haven’t these buyers and sellers heard of appraisal contigency?
An appraisal contingency is a common requirement when a buyer is financing the home with a loan from a lender. The lender will send a 3rd party home appraiser to assess the value of the home and make sure the home’s value matches with the offered purchase price. The lender is only willing to lend out as much money as the home’s appraised value. So what happens when the appraised value falls short? A couple of things can happen, the buyer can ask the seller to renegotiate the purchase price lower to match the appraised value at which satisfies the lender and the transaction continues. Or if the seller refuses to lower the price, then the buyer can opt to pay the “appraisal gap” difference between the appraised value and the purchase price out of their own pockets if they have enough cash in reserves. Lastly, if no deal is reached, the buyer can walk away and the deal falls apart.
So you may be thinking, maybe buyers are purposely overbidding to get the home under contract and then planning to renegotiate the purchase price IF the appraised value comes in low. This can be a dangerous gamble for a buyer as appraisal can come in at purchase price and buyer must be willing to pay what they offered. Well, the seller and their agent also understands the risks on their end. So now if a buyer wants to offer over list price. Sellers are saying to buyers, put your money where your mouth is and include an “appraisal gap protection” clause in your offer. An appraisal gap protection essentially says that the buyer is willing to pay up to either 100% of the appraisal gap or only say $10,000 above the appraised value, for example only the actual amount can be whatever you want. Also accompanying the appraisal gap protection clause would be proof of funds from the buyer showing that they do indeed have these reserve funds already in their possession.
So not only are sellers getting top dollar in this market, but they are also getting extremely favorable purchase terms. If you are a buyer looking in a red hot real estate market, you may need to consider using an appraisal gap protection clause to help make your offer be taken more seriously by sellers. So definitely put this in your tool belt and discuss with your buyer agent if it may be something you may want to use in your future offers. Good luck buyers!