Many professionals play a role in real estate transactions. Mortgage professionals help people obtain financing. Real estate agents help sellers list their properties and help buyers look through available inventory.
Inspectors, surveyors and appraisers are all important as well, as they help ensure that buyers receive what they pay for and that lenders don’t overextend themselves. Mortgage companies typically require appraisals as a means of verifying that the price offered for the property accurately reflects the current fair market value.
An appraisal gap occurs when an appraisal comes in below the price offered for a property. What impact can an appraisal gap potentially have on a residential real estate transaction?
Buyers may need to change their financial plans
An appraisal gap indicates that the buyer may have offered more for the property than the mortgage lender can recover in a foreclosure scenario. The lender may refuse to finance the transaction or may adjust the funds available based on the appraisal results.
Buyers who intend to follow through with the transaction may have to act assertively to keep the transaction on schedule. In some cases, it may be possible to work with the seller to adjust the offer to reflect the appraised value of the home. The seller might perform repairs that address issues that drag down the price of the property.
If the seller does not agree to perform repairs or reduce the price, then the buyer may need to look at their options for financing. Working with a different mortgage company can sometimes help. A new appraisal could come back higher. However, there’s never any guarantee of success. Buyers may need to secure funds to cover the appraisal gap, possibly by borrowing money from family or liquidating certain assets.
Buyers may need to cancel the closing
The unfortunate reality is that many buyers facing an appraisal gap cannot borrow money from others on short notice and may not be able to convince the seller to adjust the sale terms based on the appraisal. Sometimes, buyers have no option but to walk away from a transaction despite hoping to purchase the home. In such scenarios, their earnest money can be at risk unless they included appropriate contingency in their initial offer.
Having the right support when drafting documents for a residential real estate transaction, including offer documents, can reduce the risk of buyers losing their earnest money and facing other major setbacks. The possibility of an appraisal gap because of market fluctuations is one reason that buyers often need to have support throughout the purchase process.
