In the highly competitive housing market, buyers need to have more than great finances. Even an ideal client who knows what he wants and is ready to act immediately needs to have one or two tricks to secure his dream home. In many cases, this means making an offer that is higher than the purchase price of the property.
What is Appraisal Gap Coverage?
Buyers may have to exceed the asking price to accept the offer. However, if the property is offered above the asking price, it may exceed the amount the bank values the home.
Here is an example: Suppose your home is listed for $ 100,000 and you have a contract with a selling price of $ 110,000. However, the valuation is only $ 105,000. Your mortgage lender does not cover the gap for you. In this scenario, the buyer must fork an additional $ 5,000 in cash to close the transaction, convince the seller to accept a new purchase price of $ 105,000, or leave the transaction.
Sellers are afraid of the latter option, so if they lack a rating, they want to see a guarantee of an offer that exceeds the asking price. Sellers want buyers to come up with some money to cover the difference between ratings and offers.
This is called appraisal gap coverage. If the valuation is lower than the agreed purchase price, it is insurance for the seller that the buyer pays an additional amount that exceeds the valuation of the home.
To change the previous example, suppose the house is listed for $ 100,000, the buyer offers an appraisal gap of $ 110,000 and $ 1,000, and the house appraisal is $ 105,000. The appraisal gap coverage will begin, the buyer will come up with $ 1,000 in cash and the new purchase price will be $ 106,000. The buyer must pay the seller $ 1,000 in cash, as the lender does not include the appraisal gap coverage in the mortgage.
If the seller is considering two equivalent offers, one offer has valuation gap coverage and the other does not, the seller uses the offer with valuation gap coverage. In addition, in this scenario, the buyer can get a home for less than originally planned, which is a win-win.
Housing appraisal process
Home appraisal is a fair expert opinion on the value of a home based on a nearby recently sold property. This is done by an independent third party appraiser contracted (often by the lender) to establish the value of the property. This provides another eye on property and state opinions. In the case of rehabilitation, the appraisal can establish the “current” value and the “target” value.
What are the steps that go through the evaluation process?
1. Third party appraisal service
As soon as the property is contracted, the lender collects the appraisal payment and orders the appraisal through a third party appraisal service. The lender cannot determine who the appraiser is.
2. Nearby comp
Once the appraisal is scheduled, we will notify the seller when the appraisal will take place and will do our best to achieve a high appraisal value.
Appraisers should also be provided with a list of 3-5 “as-is” comps sold in the area over the last 6 months. If it is a “target” rating, include the proposed construction budget and 3-5 “target” comps sold in the last few months. The appraiser may or may not use the information. However, this can help you better understand the level of rehabilitation that the buyer is trying to do or if you are new to the area.
3. Contact the lender
Once the assessment is complete, the buyer should contact the lender to see when the report will be returned. If an extension of the appraisal objection is required, the buyer should ask the realtor to obtain a signed amendment and extension contract so that the buyer can protect their serious money.
4. Review by members of the National Association of Realtors
When the appraisal report is returned, the buyer should check with the real estate agent.
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When do you need appraisal gap coverage?
In the highly competitive housing market, people can really get hooked on their offer. This is a problem for sellers. Because they are likely to take the best offer and the real estate appraisal will only come back below the selling price.
In that case, the buyer and seller must agree on what the home price will be and / or who will pay the difference between the offer price and the appraisal. Therefore, the appraisal gap guarantee clause of the contract will help the seller feel better about taking the best offer, even if they are worried that the appraisal will not support it.
How does Gap Coverage work with offers?
Appraisal Gap Coverage enhances buyer offers in any market. That said, it is most often used in high-demand markets where buyers need to incentivize sellers to receive offers.
For example, suppose a couple is considering buying a two-bedroom condo in downtown Denver, Colorado for $ 385,000, and offers from all directions. They know that they need to be strong with a serious offer. They decided to offer a $ 415,000 offer with a $ 5,000 appraisal gap coverage. Let’s say the location is valued at $ 400,000.
An offer of $ 415,000 (without compensation for the appraisal gap) means that the lender will only secure a $ 400,000 loan. Currently, there is a $ 15,000 difference between what the seller thought he could get and the loan. Now everyone needs to renegotiate: will they split $ 15,000? Will they lose their contract? No one wants this because buying and selling a home requires paperwork. Therefore, the seller does not really want to be in this position.
A house with an appraisal gap coverage of $ 5,000 and an appraisal of $ 400,000 has a $ 415,000 offer, which means that the buyer has an appraisal of + $ 5,000. Therefore, in this case, we guarantee that the buyer will offer $ 415,000 and will pay at least $ 405,000 if they return for $ 400,000. The offer is more powerful because we know that the seller will receive a rating of + $ 5,000 even if the market does not support this price.
First, bank loans do not support this, so you need to make sure that the buyer has cash to cover it. If they offer $ 5,000 in appraisal gap compensation and the appraiser says the property is of low value, the buyer must come to the closing table with $ 5,000 in cash.
This is a great tool to help make your offer stand out in a highly competitive market, but don’t confuse it with an unforeseen rating.
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Appraisal Gap Coverage vs. Appraisal Randomness
The contingent clause of a contract defines the conditions or actions that must be met in order for the sales contract to become binding. Both the buyer and seller parties must agree to the terms and sign a sales contract that includes contingencies in order to be binding.
These additional provisions allow investors to conditionally acquire assets and provide a way to get out of the contract if things get worse. However, real estate contracts are binding and buyers need to understand how they are used and how they remain competitive when making offers.
The contingent clause of the appraisal guarantees that the purchase depends on the result of the appraisal. Buyers usually only make sure that the property is worth what the seller says, or preferably more.
Unforeseen circumstances basically indicate one of the following:
- The appraisal of the property is at least as high as the purchase price. Otherwise, the buyer can cancel the transaction.Also
- If the appraisal value of the property is lower than the purchase price, the buyer can ask the seller to reduce the price, and if the seller refuses, the buyer can cancel the transaction.
Valuation contingency is often closely related to funding contingency, as lenders do not fund loans beyond the valued price.
Appraisal Gap Coverage is a great way for buyers to stand out and also acts as a protective measure against potentially overpaying real estate. In any case, it helps increase the likelihood that the offer will be accepted and should always be considered when buying real estate.