Should Buyers Offer Appraisal Gap Coverage?

Here’s what buyers need to know about appraisal gap coverage.

What is appraisal gap coverage, and when should buyers offer it? This is an increasingly important topic in our market, so I want to answer these questions for you today. 

An appraisal gap is how real estate agents describe the difference between the purchase price and the appraised value. Offering to cover a potential appraisal gap with cash has become common over the last year. At this point, I almost always ask my buyers and sellers if they know about appraisal gap coverage. 

Even with appraisal gap coverage, you can terminate the contract after a low appraisal.

Simply put, offering appraisal gap coverage means you’re willing to pay a potential appraisal gap out of pocket up to a certain amount. Let’s go through a quick example. You find a house you love, and you make an offer for $400,000. However, you also write in the contract that you will cover an appraisal gap up to $20,000. If the home only appraises at $380,000, you will be obligated to pay the difference out of pocket. 

Appraisal gap coverage is becoming common in our market as a way for financed buyers to compete with cash. Just remember that if the appraisal comes back low, both parties still have the right to terminate the contract. 

If you have questions about today’s topic, please call or email me. I am always willing to help!