The Appraisal Gap
Let's say you're a seller and you are getting multiple offers well above the list price. You're so pumped! You are already thinking about what trips you might take or what upgrades in your new home you can now make with this extra moola...but, hold up...pump the brakes my friends! Just because the price tag is shiny does not mean it's valid. The amount between your "list price" and a proposed "purchase price" is what we call the "appraisal gap" and you need to pay close attention to how it is addressed in an offer or how you are addressing it as a buyer in your offer.
Let me give you an example: Say a home is listed at the very top of it's substantiated market value of $450,000 and an offer has been submitted for $485,000 and it will need to appraise for a buyer's lender to complete the purchase. This "Appraisal Gap" can mean...
The buyer has written into the offer that they will be "assuming" the gap and paying out of pocket for anything that does not ultimately appraise over the listed value of $450,000. In this instance, make sure your agent has verified they have the proof of funds necessary to make up this gap. They not only need the $35,000 of appraisal gap money but also the funds for closing costs and down payment necessary to close. If not...it could ultimately become a problem and put all parties in a bad situation.
OR...
The buyer does not include any appraisal gap language in their offer and the home must appraise for the purchase value of $485,000. Unless you have concrete comps that you can demonstrate the value of $485,000, it is likely it will not appraise. In this scenario, both parties can either a) work out a new agreed upon price, b) the buyer can pay the appraisal gap or c) they can cut contract and their earnest money refunded to the buyer and the seller returns to market to seek a new buyer.
Why is this so very important? Appraisals usually occur or are turned in a week or two before closing. It is typically the very last thing to be done in the home buying and selling process. Most buyers and sellers are packing boxes and scheduling movers, utilities and all other items a week or two before the close. Time, money and emotion are all being spent on a daily basis leading up to that moment. The language contained in the purchase and sale agreement will either make or break your best laid plans. Protect yourself up front!!