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WHAT IS AN APPRAISAL GAP AND HOW TO NEGOTIATE IF APPRAISED VALUE COMES IN BELOW CONTRACT PRICE

WHAT IS AN APPRAISAL GAP AND HOW TO NEGOTIATE IF APPRAISED VALUE COMES IN BELOW CONTRACT PRICE

Prior to placing the home on market and entering into a purchase agreement, a Seller is best served to prepare their home for an appraisal, with the goal of ensuring the appraisal does not come in short. Incorporating appraisal gap coverage language into the purchase agreement on the front end will alleviate panic, stress, and possible collapse of the sale on the backside.

In a Seller’s market there is a limited inventory of homes bringing about multiple offer situations resulting in a contract price substantially higher than list price.  It is prudent for the Seller to negotiate appraisal gap language into the purchase contract to ensure they will not have to renegotiate terms should the appraised value come in short.

An appraisal gap is the difference between fair market value determined by an appraiser and the amount that the Buyer agreed to pay for the home.

Example: A Buyer and Seller agree to a purchase price of $300,000 and the appraisal comes back at $275,000.

A short appraisal does not mean the sale needs to be canceled. The first step would be to dispute the appraisal. Appraisals are the opinion of the appraiser and appraisers do make mistakes. Some mistakes are merely oversights which can be remedied by providing the appraiser with data to support the dispute. However, as appalling as it may be, there are appraisals that have come in significantly short due to appraisal bias based upon racial disparity.

Real estate professionals have advised Sellers for decades to neutralize and depersonalize their home to enable the Buyer to envision themselves living there. Sadly, I must report it may be necessary to do so to avoid racial bias in appraised value. If you scroll down and highlight over the map of Ohio on this link, you will find their research reflects a range of disparity of 10% to 56%. This lack of ethics exhibited by certain appraisers has resulted in FannieMae facilitating a study and guidelines for appraising the appraiser.

If the appraisal is still short after the appraisal has been disputed, the Buyer and Seller have options to consider:

  • Buyer and Seller can agree to split the difference equally or with an agreed upon variable.
  • Buyer can bring the entire difference to closing.
  • Seller can reduce the price to match appraised value.
  • Both parties can agree to terminate the contract.

In the interest of full disclosure, there have been situations where the parties could not agree, or funds were not available to bridge the gap, and the Buyer Agent (or Listing Agent if a full-service listing) agreed to reduce their commissions to save the deal.

Appraisal gap language can incorporate specific terms into the purchase contract addressing appraisals, for example:

  • Buyer waives the appraisal in its entirety.
  • Buyer agrees to bring the difference to closing regardless of appraised value.
  • Buyer agrees to bring a fixed dollar amount above appraised value not to exceed contract price.
  • Additional Language can be included stating concessions up to the amount of the appraisal shortage are automatically removed.
  • Additional Language can be included stating other items negotiated therein, such as a home warranty, are automatically removed in the event of a short appraisal.

When it comes to contract negotiations, one is limited only by their imagination and skill-set.

It is imperative, when negotiating an appraisal gap, the Seller verify the Buyer has the funds to cover the appraisal gap agreed to by both parties. I am a ‘cross your t and dot your i” kind of gal, so while this has never happened to me, I have heard stories of agents who failed to verify funds and when the appraisal gap came in short, they tried to coerce the Seller into reducing the price due to lack of funds, and in most cases the deal simply collapsed.

Selling your home on your own without the assistance of a full service Real Estate Brokerage will require both commitment and due diligence for which you may be rewarded by saving thousands of dollars in commissions. Maximizing marketing exposure is key. I have been in this industry for 4 decades, have SOLD well over a BILLION DOLLARS in Real Estate & Saved Sellers Millions of Dollars in Real Estate commissions. Please contact our team to learn how the For Sale By Owner Flat Fee MLS Listing Options at Ohio Broker Direct will enhance your marketing exposure to ensure a more expeditious sale, yielding a higher price with better terms that suit your specific needs. Reach out to us directly, visit our blog page or sign up for our newsletter to receive the latest information to ensure you have the knowledge to maximize your profit.

Respectfully,

Joan Elflein, Broker / Ohio Broker Direct Ohio Broker Direct & its Brokers or Associates assumes no responsibility or liability for any errors or omissions in this blog, we advise all participants engaged in the buying or selling of Real Estate to enlist the services of a Real Estate Attorney.

Ohio Broker Direct & its Brokers or Associates assumes no responsibility or liability for any errors or omissions in this blog, we advise all participants in buying or selling real estate to enlist the services of a Real Estate Attorney.

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