What Is an Appraisal Gap?

An appraisal gap is the difference between the home's agreed-upon purchase price and its lower appraised value. At Kentuckiana Real Estate Academy, we offer real estate courses that prepare you to pass your licensure exam and pursue a career in real estate. Our teachers, who have real-world industry experience, prepare you for more than just vocabulary. They also prepare you for next steps when you encounter situations like appraisal gaps, so you can help your clients.

Continue reading to learn what an appraisal gap is, what appraisal gap coverage entails, and how appraisal gaps affect real estate transactions.

Appraisal Gap: What Is It?

An appraisal gap occurs when the assessed market value of the house is lower than the buyer's offer. The fair market value is unbiased and based on the home's condition and market trends. A lender will not offer financing for an amount greater than the fair market value.

How Do Appraisal Gaps Affect Real Estate Transactions?

Typically, sellers want their home to sell for as much as possible, and buyers want it to sell for as little as possible. In a seller's market, there are fewer homes and more buyers, and prices can skyrocket in a bidding war. Imagine the final offer for the house is $450,000, but the appraised market value comes back at $375,000, a $75,000 difference. If the buyer is paying a 10% down payment of $45,000, that still leaves a $30,000 difference, which can derail the sale.

The buyer can:

• Negotiate a lower price with the seller.
• Come up with an additional $30,000 for the down payment.
• Exercise the appraisal contingency clause in the contract to cancel the sale, which also returns their earnest money deposit.

Appraisal Gap Coverage

Most sales include an appraisal contingency, but a buyer can limit that protection by agreeing to appraisal gap coverage. The appraisal gap clause specifies that the buyer will cover the difference between the home's appraised value and the selling price. The clause can limit it to a specific dollar amount, say $25,000, or a percentage, perhaps an additional 5%.

Appraisal gap coverage helps the seller because they're getting a higher value for the home. It also allows a buyer to purchase the home they want in a market where there might not be many available, like in a rapidly growing city, while still maintaining reasonable limits. The coverage still protects the buyer to a point; beyond that limit, they can withdraw the offer without repercussions or loss of their earnest money deposit.

Contact Us for Real Estate Courses

Understanding appraisal gaps and how they affect real estate transactions is part of preparing for a career in real estate. At Kentuckiana Real Estate Academy, we ensure you're prepared for the scenarios you're most likely to encounter. We offer in-person courses at our Louisville and Lexington locations and online, including pre-license courses, licensure exam prep, brokerage courses, and continuing education classes.

To get started, call (859) 317-4846, fill out our contact form, or sign up for one of our classes. We proudly serve the areas surrounding Louisville and Lexington, Kentucky.