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How can people avoid an appraisal gap when buying real estate?

On Behalf of | Jan 1, 2024 | Real Estate

There are multiple outside professionals who help ensure that a real estate closing goes off without any major complications. However, sometimes their services are the source of challenges. An appraiser helps ensure that the buyer doesn’t pay too much for a property and that their mortgage lender doesn’t end up overextended by financing a purchase price that does not reflect current market values. They look at the property carefully and also review recent sales in the same area.

An appraisal gap occurs when a professional appraiser determines that the home is not worth the price offered by the buyer. How do buyers address appraisal gap scenarios?

Proactively preventing them

The simplest way to address an appraisal gap situation is to simply avoid the issue. Buyers may need to carefully consider how much they offer for a property. Making the best and highest offer possible is not necessarily the right solution if the buyer requires a mortgage to pay for the property and property values in the area have recently fluctuated.

Including contingencies

Sometimes, sellers overestimate what the property is worth or the market fluctuates in the middle of a transaction. Buyers never know with absolute certainty that the price they offer is reasonable. Therefore, including contingencies related to appraisals and financing in an offer is a popular move for the protection of those hoping to buy real property.

Retaining extra capital for the gap

Given that avoiding an appraisal gap is not always possible, many buyers making aggressive offers on properties leave cash reserves on hand. Those funds could help cover the difference between the purchase price and the appraised value of the home.

If the appraisal comes in too low and buyers still want to move forward with the transaction, having capital on hand to cover the difference between the appraised value and the price offered may allow them to move forward with the transaction.

If buyers waited until the real estate market was ideal, home sales would rarely ever occur. It is possible to buy on the market where prices fluctuate when aspiring owners have proper support. Planning for likely challenges, including the possibility of an appraisal gap, can help those preparing to buy during times of economic uncertainty.