To secure a home, some U.S. buyers still agree to make up the difference when a mortgage appraisal comes in at less than the contract price – an often risky move.
NEW YORK – Some buyers looking for a luxury home in a competitive market waive the so-called appraisal gap to entice a seller to accept their offer.
Appraisal gaps happened in about 11% of residential transactions in June 2023, according to CoreLogic. They occur when homes appraise for less than the contract price, and often arise in tight markets where buyers have to bid above the asking price to secure a home. If a home’s appraisal comes in $30,000 below the agreed contract price, these buyers agree to pay that amount in addition to existing monetary terms.
“We’re still seeing supply and demand challenges in certain markets,” says Shawn Telford, CoreLogic’s chief appraiser. “There are gaps between the contract price someone’s willing to pay and what the market data shows the home would likely be selling for in a typical market without the undue influences of the fear of missing out.”
Donna Soda, an agent with Premier Sotheby’s International Realty in Lakewood Ranch, Fla., says appraisal waivers can incentivize a seller to accept one buyer’s offer over another. She has had deals where the appraisal came in below the purchase price, and the buyer and seller renegotiated to lower the price. But she has also had a deal where her clients agreed to waive the appraisal gap and had to come up with an additional $100,000 in cash at closing when the appraisal came in too low on a $2.3 million purchase.
“That was during the pandemic buying frenzy,” Soda says. “In 2020 and 2021, you would blink your eyes and a property would be off the market.”
Source: Wall Street Journal (09/03/23) Friedman, Nicole
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