What is an Appraisal Gap Guarantee in Real Estate?
by Sander Scott
September 7, 2023
IntroductionAppraisal Gap Guarantees are one of many variables involved in the transaction. Especially important in a hot market, an appraisal gap will influence the lender’s decision to lend you money for this particular property. Appraisals can be complicated, because there are many factors that go into determining the value of real estate. The appraisal process provides an unbiased third party “opinion of value.” Lenders use appraisals to determine whether or not lending money against a particular piece of property makes sense from a financial perspective—and if so how much they should lend based on their analysis.If the home appraises for less than the sale price of the home, then there will be an appraisal gap between the sale price and the appraised value.When the home appraises for less than the sale price of the home, an appraisal gap exists. Appraisal gaps can be positive or negative. An appraisal gap is not a guarantee that your loan will be approved. The lender may allow you to bring in equity from other sources (such as another property) to make up part or all of your loan amount after determining that you have enough equity in those other sources. If this happens and there is still an appraisal gap, then it’s possible that no one will buy your home because they cannot get financing because of insufficient funds needed to pay off existing loans associated with selling your current home before buying another one with more favorable interest rates available today!Appraisal Gap Guarantees Help Your Offer Compete with Cash OffersAppraisal gap guarantees are put in place to hold buyers and sellers harmless from those appraisal gaps. If the home appraise for less than the sale price, the buyer will cover the gap. The seller is not responsible for this gap. This makes a buyer’s offer stronger and can help a buyer compete with cash offers. Sellers prefer cash offers because there is no risk that an appraisal will come in below the agreed-upon price and potentially muddle the deal. That’s where an appraisal gap guarantee can help give a seller “peace of mind” and help your offer “win the day”!Examples of Appraisal Gap Guarantee Contract Language (to put in an Offer to Purchase)Appraisal Guarantee ClauseAppraisal Guarantee: Purchaser agrees to pay $XXX above the appraised value not to exceed the Purchase Price of $XXX.If the Appraisal Guarantee is not sufficient to satisfy the appraisal deficiency all parties agree to negotiate in good faith to reach a satisfactory resolution.If a satisfactory resolution cannot be achieved Seller may declare this agreement null and void and all Earnest Money shall be returned to Purchaser.Appraisal/ Gap FinancingIn the event, the appraised value comes in below Purchase Price, then Buyer agrees to pay up to $__________ over appraised value not to exceed the purchase price. Any such cash differential shall be applied to Buyers`required Cash at Closing.ConclusionAppraisal Gap Guarantees are just one more tool in your tool chest as a buyer to make sure you’re putting your best foot forward when making an offer on a home you love!Read About More Strategies to Help You WIN AT REAL ESTATE:Escalation ClausesBiggest Mistake a Buyer Can MakeGet a “Marked Title” at Closing