What is an Appraisal and an Appraisal Gap?

Many people often wonder what exactly an appraisal is during a real estate transaction and what the purpose of it is. It’s not rocket science, but it can be complicated— let me explain.

An appraisal is conducted when a buyer is using a loan to buy a property. The bank gets a third-party appraisal to ensure the property is worth what the buyer has offered and what the bank is loaning to that buyer to purchase the property.

Appraisals come up often in our current market as there are often multiple offers on a property with a buyer offering to pay more than a seller's asking price.

When a seller sees a number that’s higher than the asking price, they want to be guaranteed that it is the amount that they are going to get. So, they sometimes will ask the buyer if they would be willing to cover an appraisal gap. This means you would cover the difference between the amount you offered on the property and the appraised value. This only happens if the appraised value comes in lower than what the buyer offered.

If you’re a seller, this is something to ask your agent— to see if you should request a gap be covered if a buyer offers you more than your asking price. Buyers looking to make competitive offers should chat with their agents about including this gap language in their offer. You will also want to check with your lender to see what your best options are. Be sure to understand the numbers before committing to adding this to your offers.

Feel free to reach out for more clarification on this process. I am here to help every step of the way!