What is an Appraisal Gap Clause and Will it Help You Win a Home Contract War?

Though the news is showing that the real estate market is becoming less competitive for buyers we are still in a seller's market where competition among buyers is still present.

Over the past three years, buyers have faced tough competition with a low inventory of homes and practically every home seeing more than one offer. This means that buyers have to compete with other buyers putting in an offer on the same home.

There are many strategies that buyers and their real estate agents have employed to help their offer stand out against the crowd and become the accepted offer on a home. One of those strategies is including an appraisal gap clause.

What is an appraisal gap clause?

In any real estate purchase offer contract, there are many different parts and items including clauses. A clause can be used to help communicate extra information above and beyond the standard to add something to an offer or communicate more clearly expectations.

Right now a clause that is being added as a strategy to sweeten the deal is an appraisal gap clause. This is an offer communicating that the buyer will cover the difference between their offer and what an official appraisal comes in at.

It is not uncommon for homes with multiple offers to get into bidding war situations or to have buyers automatically offer above the list price as their purchase price for the home. Sometimes this can mean that when a professional appraiser comes in to determine the fair market value of the home the offer price can be above what the professional appraiser appraises the property for.

For example, if a buyer offers $425,000 on a home with a list price of $405,000 and the house is appraised for $400,000, a buyer that has included an appraisal gap clause says they are willing to pay the extra $20,000 out of their pocket.

In some very popular markets, this could mean a buyer offers well above an appraisal and could end up being responsible for a large sum of money above the appraised price of a home. This is why it is also wise to include a limit in your appraisal gap clause. You can include in the appraisal gap clause a certain amount over the appraisal value that you would be willing to pay.

How can an appraisal gap clause be helpful?

Low appraisals below an offer will impact a buyer's ability to secure mortgage financing on a home. It is very rare that a mortgage lender does not make an appraisal a mandatory requirement of loan approval.

A mortgage is a secured debt using the home being purchased as collateral. As such if a home is not worth the amount the buyer has offered to pay for it this is a very large risk for the lender.

It is very rare that a bank will approve a mortgage loan for the full amount of a buyer's offer if it is above the appraisal price. In the case of an appraisal gap where a home is appraised for less than a buyer has offered to pay for it, the mortgage company will require the buyer to pay this difference out of their pocket or will not approve the loan.

When home sales fall apart one of the biggest reasons they do so is for a low appraisal. Sellers will not want to take a chance of taking a home off of the market for a real estate sale that is likely to not go through. The appraisal gap clause helps to ensure that this will not happen when a buyer is offering above the list price.

Related:  Why Does the Housing Market Remain so Competitive?

When is it a good idea to include an appraisal gap clause?

Including an appraisal gap clause could help to make a seller more confident and accepting of your offer above the list price. If you include one this does make you responsible to pay extra money on the home out of your pocket. You would also be paying more for the home than a professional has said the home is currently worth.

This can be a means to make your offer stand out against others but it should not be included without careful consideration and the help of a real estate professional.

For more information on purchasing a home in Granbury Texas and surrounding areas please contact us anytime.

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