Appraisal Gap?! What do ya mean Appraisal Gap?!
What exactly is Appraisal Gap and how can it help me buy a house?!
In a competitive housing market like Denver’s, offers are starting to get more creative. With the amount of cash buyers and investors in the market on top of inventory shortages, we’ve been seeing homes go for well over asking on a routine basis. At first glance this seems like a seller’s dream. Less work fixing up your home before putting it on the market and knowing full well you’ll sell quick for a big buck. While this looks great it’s actually becoming a huge issue for both buyers and sellers. When offers come in over asking, chances are the sale price will be over the appraisal price too. When this happens, and the buyer doesn’t have cash they will most likely have to negotiate with the seller to lower the price to appraisal or include an appraisal gap with their offer. If the sellers refuse to lower price, then the buyer must come up with the difference between appraisal and price. This is called an appraisal gap. When it comes to FHA offers this presents a unique challenge for the seller as FHA loans come with a clause to ensure it appraises at sale price and gives the option for the buyer to back out. In the 300-400k market we’re seeing a growing trend of a mandatory appraisal gap clauses in order to have your offer looked at seriously. Even if you bid higher than asking, which will most likely happen.
Now the good news. While having an appraisal gap doesn’t guarantee you’ll win the bid it does help make the seller feel more comfortable taking your offer, especially with an FHA loan. Knowing they’ll get over asking can make all the difference in the world, even at just 2-3k over. Since most FHA buyers don’t have the cash for large gaps the small sentiment of saying “I can go over but not a ton” may be enough for some sellers to say “great!” Remember money isn’t always the motive and sellers are putting their homes at what they want to get out of it. If they get at least asking and can sell to a loving family or young couple looking to make a house a home rather than an investor who will simply flip the house and sell it quick, then a small appraisal gap can go a long way!
Within every market you’ll have to get creative. Within Denver’s you may have to pull out all the stops. Going over asking has become normal. If you put an offer for 5k over and include an appraisal gap for 5k you’re chances of winning that bid have increased dramatically. If you’re going to bid over asking anyways include an appraisal gap to make the seller know you’re serious about your offer and have the cash to back it up. Small guarantees can go a long way!