Real estate closings do not always proceed successfully just because sellers accept a buyer’s offer. The buyer still needs to finalize the mortgage, sign the closing paperwork and assume possession of the property.
Many issues can arise before the completion of the real estate transaction. Issues with financing are relatively common. The appraisal might come in lower than the amount offered for the property, which is known as an appraisal gap.
Buyers may not be able to complete the transaction or may need to renegotiate with the seller. How do buyers prevent an appraisal gap from impacting a closing?
Making practical rather than competitive offers
When there’s a shortage of properties on the market, many buyers and their real estate agents fall into a habit of bidding aggressively on properties. They want the offer to stand out from all others.
That approach is not necessarily the best during a more stable market. Buyers should not make offers based on outbidding others but on what the property is worth. They should also look closely at the condition of the property and the local market before determining how much to offer.
Maintaining a cash reserve
An appraisal gap does not automatically prevent the closing from occurring. It may simply limit how much financing the lender agrees to provide based on the fair market value of the property. If buyers are in a position to keep extra capital on hand, doing so could make it easier for them to proceed with the transaction even if the appraisal comes back disappointingly low.
Appropriate contingencies integrated into the initial offer can also help protect buyers if an appraisal gap might put them at risk of losing their earnest money. Having legal guidance when preparing for potential challenges during residential real estate transactions can help buyers bid with confidence.