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What Buyers and Sellers Need To Know About the Appraisal Gap

What Buyers and Sellers Need To Know About the Appraisal Gap | MyKCM

It’s economy 101 – when supply is low and demand is high, prices naturally rise. That’s what’s happening in today’s housing market. Home prices are appreciating at near-historic rates, and that’s creating some challenges when it comes to home appraisals.

In recent months, it’s become increasingly common for an appraisal to come in below the contract price on the house. Shawn Telford, Chief Appraiser for CoreLogic, explains it like this:

Recently, we observed  buyers paying prices above listing price and higher than the market data available to appraisers can support. This difference is known as ‘the appraisal gap . . . .’”

Why does an appraisal gap happen?

Basically, with the heightened buyer demand, purchasers may be willing to pay over asking to secure the home of their dreams. If you’ve ever toured a house you’ve fallen in love with, you understand. Once you start to picture yourself and your furniture in the rooms, you want to do everything you can to land the property, including putting in a high offer to try to beat out other would-be buyers.

When the appraiser comes in, they look at things a bit more objectively. Their job is to assess the inherent value of the home, so they’re going to study the facts. Dustin Harris, Appraiser Coach, drives this point home:

It’s important for everyone to understand that the appraiser’s job in the end is to remain that unbiased third party, to truly tell the client what that home is worth in the current market, regardless of what decisions have been made on the price side of things.”

In simple terms, while homebuyers may be willing to pay more, appraisers are there to assess the market value of the home. Their goal is to make sure the lender isn’t loaning more money than the home is worth.  Also, appraisers from the Houston area may or may not have experience with coastal property and coastal property pricing, as pricing may be different for a canal, beachfront, or bayfront property.  But, an appraisal is objective, rather than emotional.

In a highly competitive market, having a discrepancy between the two numbers isn’t unusual. Here’s a look at the increasing rate of the national appraisal gaps, the local marked may be according to data from  CoreLogic (see graph below):

What Buyers and Sellers Need To Know About the Appraisal Gap | MyKCM

What does this mean for you?

Ultimately, knowledge is power. The best thing you can do is understand appraisal gaps may impact your transaction if you’re buying or selling.   If the number of listings remains low there may continue to be multiple offers.  As the quantity of listed homes for sale increases multiple offers will decrease.  In a multiple offer situation you may encounter an appraisal below your contract price, know that in today’s sellers’ market, the most common approach is for the seller and buyer to negotiate appraisal requirements with initial contract.  With multiple offers, the sellers may ask the buyer to make up the difference in appraisal price versus sales price. Buyers, may agree to bring extra money to the table if they really want the home.

Above all else, lean on your real estate agent. Whether you’re a buyer or seller, your trusted advisor is your ally if you come up against an appraisal gap. We’ll help you understand your options and handle any additional negotiations that need to happen.

Bottom Line

In today’s real estate market, it’s important to stay informed on the latest trends. Let’s connect so you have an ally to help you navigate an appraisal gap to get the best possible outcome.

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