Here’s what sellers should know about appraisal gap coverage.
We’re often asked by sellers, “What is this appraisal gap people are talking about?”
What they’re referring to is appraisal gap coverage—a relatively new term that’s become commonplace in our market. As more and more buyers bid properties above their list prices, they want to offer sellers some sort of guarantee that, if their properties don’t appraise for the prices they’re offering, they’ll cover the gaps between the appraised values and offer prices (up to a certain amount). Some buyers are offering this in the form of a flat figure (e.g., $5,000, $10,000, or $15,000). Others are offering 100% gap coverage with no ceiling on how much they’ll guarantee.
“Buyers can bridge the gap with cash or adjust their financing.”
For example, if you list your home for $400,000 and get an offer for $450,000, the home needs to appraise for $450,000. If the buyer offers a $10,000 gap coverage and the home appraises for $440,000 instead of $450,000, they’ll automatically assume that gap in addition to the down payment. If the home appraises for $430,000, then that extra $10,000 needs to be negotiated over.
From a purchase agreement standpoint, it’s important to talk to the lender in this type of situation. It’s one thing for a buyer to say they’ll guarantee X amount of money; it’s another thing for a lender to verify that they’ll be able to cover an appraisal gap along with their down payment. Buyers can bridge the gap with cash or adjust their financing. These are the kinds of things your listing agent needs to ask about when looking at gap coverage in a purchase agreement so that everyone is on the same page and there aren’t any discrepancies down the road.
As always, if you have questions about this or any real estate topic, please let us know. We’d love to speak with you.