In the real estate world, the process of buying and selling properties involves several stages, one of which is the appraisal process. An appraisal is an independent assessment of a property's value conducted by a certified appraiser. Sometimes, this appraisal results in an "appraisal gap."
What is an appraisal gap?
An appraisal gap occurs when the appraised value of a property comes in lower than the agreed purchase price. For instance, if a buyer and seller agree on a price of $500,000, but the appraisal comes in at $480,000, there is a $20,000 appraisal gap. This discrepancy can cause issues in the transaction, particularly if the buyer relies on a mortgage.
Lenders often base the loan amount on the appraised value rather than the purchase price. For example, if a buyer is getting a loan for 80% of the home's value, the lender will provide 80% of $480,000 (the appraised value), which is $384,000. The buyer must then cover a larger gap than anticipated.
How do buyers and sellers resolve an appraisal gap?
When faced with an appraisal gap, buyers and sellers can consider several options:
1.) Renegotiate the Purchase Price:
The buyer and seller can renegotiate the purchase price to align with the appraised value. This might mean the seller lowers the price to $480,000 or a mutually agreed amount close to the appraisal. 2.) Increase the Down Payment:
The buyer can increase their down payment to cover the difference. For instance, if the buyer really wants the property and has the financial means, they can make up the $20,000 gap with additional cash. 3.) Split the Difference:
Another common approach is for the buyer and seller to split the difference. The seller might lower the price slightly, and the buyer could increase their down payment to cover part of the gap. For example, the seller reduces the price to $490,000, and the buyer comes up with an extra $10,000. 4.) Challenge the Appraisal:
If the buyer or seller believes the appraisal is inaccurate, they can challenge it. This involves providing additional data or comparable sales (comps) to the lender to request a revised appraisal. However, this process can be time-consuming and doesn't guarantee a different outcome.
Sometimes, getting a second appraisal from another independent appraiser can offer a different perspective on the property's value. If the second appraisal is higher, the lender might consider it. 6.) Walk Away from the Deal:
If the gap cannot be resolved through the above methods, either party can opt to walk away from the deal. Buyers can include a contingency in the contract that allows them to back out if the appraisal comes in low.
Conclusion
An appraisal gap can be a challenging aspect of a real estate transaction, but with open communication and flexibility, buyers and sellers can find a resolution. Understanding the various options allows both parties to prepare for potential discrepancies and ensure a smoother transaction. Knowing what an appraisal gap is and how to address it helps buyers and sellers anticipate differences and secure a successful deal.
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