Appraisals in a sellers’ market can be troublesome, and transactions can fall apart when appraisals come up short—creating an appraisal gap. An appraisal gap is the difference between market value (per the appraiser) and the price of the home agreed upon on the signed contract of sale. The value difference only becomes an “appraisal gap” when the offer is higher than the appraisal.

Why are they happening? Well, with rising house prices, the sold comps can’t keep up, and if you offer a seller more than they are asking, there is a high likelihood that there could be an appraisal gap. For instance, if a listing receives multiple offers and the winning offer goes $30,000 above the asking price, chances are there could be an appraisal gap. 

Also, sellers are really pushing high on list prices due to such a prolonged and strong sellers’ market. Even though their real estate agent may caution them that it might not appraise, they are counting on such high buyer demand that they will be able to get a buyer to either waive their appraisal within the financing contingency, or pre-negotiate a dollar amount they will pay to make up for an appraisal gap. 

It’s important to fully inform buyers of what they are committing to when they offer an appraisal waiver to cover a gap in appraisal value vs. contract price. Buyers need to realizethat the appraisal gap amount are additional monies that need to be paid by them at closing, either as part of their loan, or, if not incorporated into the loan, as part of the their obligation to provide cash proceeds at closing. Sellers may request a proof of funds from buyers for these additional monies if they are significant. Buyers also need to realize that they are waiving the right to terminate a contract under the appraisal provisions contained in any financing contingency.

Lauren Bunting is an Associate Broker with Keller Williams Realty of Delmarva in Ocean City, Maryland.  

Lauren Bunting is a Broker with Keller Williams Realty of Delmarva in Ocean City, Maryland.