Bob Kutschbach, owner and broker of Carleton Realty, explains the appraisal gap and how buyers are using it to make a competitive offer in our low inventory housing market.
What is an appraisal gap? In our housing market buying a home is extremely competitive. It is common for a buyer to offer more than list price for a home. While this practice is a little risky, the truth of the matter is that it is a necessity if you are going to be the successful bidder when buying a home.
Many of the contracts that we are seeing today are $5,000 to $10,000 over list price. In a typical real estate market houses sell for 97% to 98% under list price. But not today! We have 7 buyers for every home that goes on the market. this means that buyers have to be creative to make a competitive offer.
One of the strategies that buyers are using is to offer over list price by an amount of money determined by home the home is priced, $5,000, $10,000 or even $15,000 over list. Sometimes the the house is priced a bit low and worth well over the list price. Sometimes the buyer loves the home and is willing to pay a premium price because houses are appreciating so quickly right now. A home may easily be worth the contract price by the end of the year.
Here is the problem, the appraisal may come in for less than the purchase price. This happens occasionally. Sometimes the home appraises for the $5,000 to $10,00 over the list price, usually because there are more homes that have sold recently to support the higher price. But we are concerned with those appraisals that come in lower.
The appraisal gap is where the buyer offers to bring the difference between the contract price and the appraised value in cash. If the house appraises for list price but the buyer is in contract for $10,000 over list price the buyer has offered to pay up to $10,000 over the appraised value if necessary. They will cover difference but put a limit at $10,000. This strategy is very attractive to sellers. Offering over appraised value when the standard real estate purchase contract states that the contract is voidable if the home does not appraise at list price. The seller likes the offer where the buyer has offered to cover the appraisal gap.
A good buyer and a good agent should put a cap on the amount over appraisal that they will cover. Not offering any amount but up to $5,000 or $10,000 over. This is a great strategy to stand out in a multiple offer situation like we see in our housing market.
If you have questions about the appraisal gap please reach out to one of our agents!