Dealing with an Appraisal Gap

In today’s real estate market, low inventory and high demand are driving up home prices. As many as 54% of homes are getting offers over the listing price, based on the latest Realtors Confidence Index from the National Association of Realtors (NAR).

Shawn Telford, Chief Appraiser at CoreLogicelaborates:

“The frequency of buyers being willing to pay more than the market data supports is increasing.”

While this is great news for today’s sellers, it can be tricky to navigate if the price of your contract doesn’t match up with the appraisal for the house. It’s called an appraisal gap, and it’s happening much more frequently in today’s market.

In fact, it just happened on one of my transactions.  The home checked off every box on Linda’s list. It had an in-law suite on ground floor plus 3 bedrooms and 4-1/2 baths, private backyard, private indoor garage, roof deck, modern appliances in an updated kitchen and a master suite with a roof deck.

The condo, in the Journal Square area, was listed at $1,150,000. Linda (whose name has been changed) was bidding against another buyer.  Although, the negotiated price was below the asking price, CHASE appraised the condo $300,000 below the negotiated price.  It was even $45,000 below the seller’s 2016 purchase price.    

According to recent data from CoreLogic19% of homes had their appraised value come in below the contract price in April of this year. That’s more than double the percentage in each of the two previous Aprils.

The chart below uses the latest information from NAR’s Realtors Confidence Index to show how often an issue with an appraisal slowed or stalled the momentum of a house sale in May of this year compared to May of last year.

When an appraisal comes in below the contract price, the bank won’t loan more than the property’s appraised value. That means there’s going to be a gap between the amount of loan the buyer can secure and the contract price on the house.  In Linda’s case the gap with Chase was a staggering $300,000

In a situation like this, both the buyer and seller have a vested interest in making sure the sale moves forward with little to no delay. The seller will want to make sure the deal closes, and the buyer won’t want to risk losing the home. If the gap is small, sellers may ask the buyer to make up the difference in today’s competitive market.  However, in this case the buyer felt the appraisal by Chase did not represent the value of this unique home.  Linda decided to switch to a local lender that was more familiar with our market trends and the seller has agreed to a wait. 

Bottom Line

With almost 20% of appraisals coming in below the contract price, buyers need to be prepared to either make up the difference or switch lenders.  In this market, buyers would be wise to use local lenders that know the market and current market trends.  Whether you’re buying or selling, your real estate agent is your ally. They’re with you throughout the process and are there to help you navigate the unexpected, including potential appraisal gaps.