Alternate name: When a property “didn’t appraise.”
“An appraisal gap is a term that describes when the appraisal comes in below what is being offered,” Woody Fincham, an appraiser and founder of Fincham & Associates, told The Balance in a phone interview. “It’s a common thing in a heated market.” Appraisal gaps become more common when there is low housing inventory and high demand for properties, which has occurred in the U.S. housing market in recent years. For example, let’s say you’ve found a property to buy. Due to heavy interest from other buyers, you offer $320,000 on a $300,000 list price and go under contract at that price. Your lender requires an appraisal from an independent appraiser to evaluate whether the house is worth $320,000. If the appraiser determines that the property’s value is $290,000, you have an appraisal gap of $30,000 between the market value and the contracted price. At this point, you, your lender, and the seller will have some decisions to make on how and whether the sale will proceed based on the appraisal gap.
How Does an Appraisal Gap Work?
Once an appraisal gap occurs, there are two paths forward. The first involves disputing the appraised value as it stands after the appraisal report is delivered, but the other path involves accepting that value and deciding how to proceed from there. If your seller won’t budge on price and your home doesn’t appraise for the contracted price, you can typically cancel the contract per what’s called the “appraisal contingency.” If you aren’t willing to cancel the sale and can’t negotiate a lower price, you’ll need to pay the appraisal gap amount in cash as part of purchasing the home, so you would have a larger down payment.
Disputing an Appraisal Gap
If your appraisal results in an appraisal gap, the first step is to read the report in detail to see how the appraiser determined the home value. “An appraisal report is a thesis with detailed additional narrative, so look at the adjustments they made,” Fincham said. “Are they looking at appropriate comps? If you’re in a heated market with appreciation, and they’re only using six-month-old comparable sales without adjustments for time, that’s a red flag.” Fincham said he has seen underwriters reevaluate an appraisal due to elements of the report and order a new appraisal as a second review of the property’s value. Because many real estate markets are classified as “rapidly appreciating,” it can be challenging to find comparable sales that truly reflect the current market conditions with complete nuance. The many complexities in the calculation of property value mean that sometimes there are conditions in which a second appraisal will shed new light on the value.
What Appraisal Gaps Mean for Home Purchase in Competitive Markets
Many sellers prefer a cash offer because it isn’t dependent on a favorable appraisal. Competitive markets tend to see more cash offers, which makes it harder for buyers to compete, Fincham said. In a competitive market, you may want to consider homes with prices slightly lower than your budget. That way, you can offer a competitive bid or potentially offer more funds to fill any appraisal gaps. A good real estate agent will have a sense for whether a home is overpriced or likely to appraise with an appraisal gap. They can advise their clients and provide any relevant comparable sales, Fincham said. Real estate websites such as Zillow or Trulia typically include estimated home values based on algorithms with their listing. They are not official, but they can help buyers get an idea of value so they know whether or not to anticipate an appraisal gap, he said.
