By Mel Dorman, July 16, 2021
In competitive housing markets, buyers need to have more than great finances. Clients who know what they want and are ready to act quickly should have a trick or two up their sleeves to secure their dream home. Oftentimes, this means making an offer that is higher than the property’s purchase price. But when offering above the asking price on a property, there is a chance that it may be more than what the bank appraises the home for.
This is where appraisal gap coverage comes in: it is insurance for the seller that the buyer pays an additional amount over the home’s appraised value if the appraisal comes in less than the agreed-upon purchase price. An appraisal gap guarantee clause in the contract helps the seller feel better about taking the highest offer even if they are worried the appraisal won’t support it. If a seller is looking at two equal offers and one offer has appraisal gap coverage, but the other offer doesn’t, they will go with the offer with the appraisal gap coverage. Win!
Understand a bank loan will not support this, so the buyer needs to make sure they have the cash to cover it. If they offered a $5,000 appraisal gap coverage and the appraiser says the property is worth less, the buyer has to come to the closing table with the $5,000 in cash.
This is a great tool to help an offer stand out in a competitive market, but it should not be confused with an appraisal contingency.
Mel Dorman
Broker | OR & WA
She/They
Ten years ago, Melissa was living in a slum in Kolkata, India, helping over 200 women escape sex trafficking by providing alternative work at a social business...
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