Purchasing real estate is undeniably a significant way for an investor to diversify their portfolio. While exciting, the process can also trigger anxiety, especially for first-time homebuyers. One challenge that investors should anticipate is the appraisal gap. This phenomenon plays out when the property’s appraised value falls short of the seller’s asking.
This discrepancy can derail financing, force renegotiations or even cost a buyer a good real estate deal. Fortunately, there are strategies to minimize the risk of an appraisal gap and help ensure a smoother transaction.
Research comparable sales
Comparable sales are recently sold properties similar to the one a real estate buyer is considering. Buyers should pull data on recent transactions and compare them to the home they are interested in. If the seller’s asking price seems significantly higher than the comparables, it could be a red flag that the property might not appraise for the agreed-upon amount.
Get pre-approved and work with a local lender
A knowledgeable lender will have a good understanding of the regional market and can provide pointers into how appraisals are conducted in the area. Additionally, getting pre-approved for a mortgage before beginning house hunting can give buyers a clear idea of their budget and help them avoid overbidding on a property.
Include an appraisal contingency in the offer
As the name suggests, an appraisal contingency is a safety blanket that allows buyers to back out of a real estate deal. Including this clause in a purchase agreement can also allow room for renegotiating the price if the property appraises for less than the agreed-upon amount. This contingency protects buyers from being forced to cover a large appraisal gap out of pocket or risk losing their earnest money deposit.
An appraisal gap can be a stressful and costly hurdle in the home-buying process, but it’s not inevitable. Buyers can avoid this obstacle by doing their homework and enlisting dedicated legal guidance as proactively as possible.