What Buyers and Sellers Need To Know About the Appraisal Gap

What Buyers and Sellers Need To Know About the Appraisal Gap | MyKCM

What is an appraisal gap?

An appraisal gap occurs when an appraisal comes in below the contract price on a house. Today’s hot real estate market contributes to a higher rate of appraisal gaps.

It’s economy 101 – when supply is low and demand is high, prices naturally rise. That’s what’s happening in today’s housing market. Home prices are appreciating at near-historic rates, and that’s creating some challenges when it comes to home appraisals.

In recent months, it’s become increasingly common for an appraisal to come in below the contract price on the house. Shawn Telford, Chief Appraiser for CoreLogic, explains it like this:

Recently, we observed buyers paying prices above listing price and higher than the market data available to appraisers can support. This difference is known as ‘the appraisal gap . . . .’”

Why does an appraisal gap happen?

Basically, with the heightened buyer demand, purchasers are often willing to pay over asking to secure the home of their dreams. If you’ve ever toured a house you’ve fallen in love with, you understand. Once you start to picture yourself and your furniture in the rooms, you want to do everything you can to land the property, including putting in a high offer to try to beat out other would-be buyers.

When the appraiser comes in, they look at things a bit more objectively. Their job is to assess the inherent value of the home, so they’re going to study the facts. Dustin Harris, Appraiser Coach, drives this point home:

It’s important for everyone to understand that the appraiser’s job in the end is to remain that unbiased third party, to truly tell the client what that home is worth in the current market, regardless of what decisions have been made on the price side of things.”

In simple terms, while homebuyers may be willing to pay more, appraisers are there to assess the market value of the home. Their goal is to make sure the lender isn’t loaning more money than the home is worth. It’s objective, rather than emotional.

A visual look at increasing rate of appraisal gaps

In a highly competitive market like today’s, having a discrepancy between the two numbers isn’t unusual. Here’s a look at the increasing rate of appraisal gaps, according to data from  CoreLogic (see graph below):

What Buyers and Sellers Need To Know About the Appraisal Gap | MyKCM

What does this mean for you?

Ultimately, knowledge is power. The best thing you can do is understand appraisal gaps may impact your transaction if you’re buying or selling. If you do encounter an appraisal below your contract price, know that in today’s sellers’ market, the most common approach is for the seller to ask the buyer to make up the difference in price. Buyers, be prepared to bring extra money to the table if you really want the home.

Above all else, lean on your real estate agent. Whether you’re a buyer or seller, your trusted advisor is your ally if you come up against an appraisal gap. We’ll help you understand your options and handle any additional negotiations that need to happen.

Bottom Line

In today’s real estate market, it’s important to stay informed on the latest trends. Contact Active Adults Realty today so you have an ally to help you navigate an appraisal gap to get the best possible outcome.

About Christine Davis

Christine grew up in northeastern Pennsylvania in a small town called Pittston, which is located between Wilkes-Barre and Scranton. Upon graduation, she enlisted in the United States Air Force, where she proudly served for eight + years at a variety of bases throughout the world, including Holland, Korea, and New Mexico. While in the Air Force, Christine spent most of her time working in the civil engineering career field where she thoroughly enjoyed meeting and working with such a diverse group of people with varying backgrounds and experiences, and learned so much from each of them. Christine’s last assignment in the Air Force was at Andrews Air Force Base in Maryland, and that’s when she discovered the Delaware beaches. Growing up in PA, her family spent time at the Jersey shore. But once she moved to MD, she became one of those many drivers making the trek across the Chesapeake Bay Friday afternoon to visit the Delaware beaches for the weekend. Upon Christine’s separation from the Air Force, she spent a small amount of time working in Washington, D.C., but it didn’t take long before she was drawn to the quiet, slow pace of Lewes and Rehoboth Beach, “the nation’s summer capital”. Christine moved to Rehoboth Beach in 1999 and finished her degree in Business at Delaware Tech. At the time she was working for a large physician organization when a friend recommended that she become a REALTOR because she loved helping people and loved looking at homes. She was reluctant for quite a while because Christine didn’t think of herself as a salesperson. But after much urging by her friend, Christine decided to get her real estate license in 2003 and has not looked back since. Christine still doesn’t think of herself as a salesperson, but rather a facilitator between buyer and seller, working toward a common goal. Christine aims to make the process as smooth and fun as possible but also educates the buyer and seller along the way so they can make the best decision possible. Christine now lives in Lewes and although she misses the mountains of PA, she thoroughly enjoys spending as much time as possible at the beach, especially Cape Henlopen State Park. Christine’s philosophy in life is that it’s too short. Never spend so much time making a living that you forget how to live.

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