In today’s hot housing market, appraisal gaps have become increasingly common. An appraisal gap occurs when a home’s appraised value comes in lower than the agreed-upon purchase price. This leaves sellers to figure out how to bridge the difference so the deal doesn’t fall through.
Sellers have a few options when faced with an appraisal gap. Here’s an overview of how they can move forward with the sale.
Lower the Purchase Price
The most straightforward option is for the seller to agree to lower the purchase price to match the appraised value. However, with home values rising, sellers may be reluctant to do this if they feel the appraisal doesn’t accurately reflect the market.
Pros:
- Simplest solution
- Allows the deal to move forward
Cons:
- Seller loses money compared to original deal
- Buyer gains equity immediately
Meet in the Middle
The seller and buyer can agree to split the difference and close at a price between the original purchase price and appraised value. For example, if the home is under contract for $500,000 but appraises for $450,000, they may decide to meet in the middle at $475,000.
Pros:
- Allows both parties to compromise
- Deal still goes through as planned
Cons:
- Seller takes a lower price than they hoped
- Buyer pays more than the appraised value
Request Appraisal Reconsideration
If the seller believes the appraisal was too low, they can ask their real estate agent to request a reconsideration of value. The agent will need to present additional comps and evidence to support a higher valuation.
Pros:
- Opportunity to correct a low appraisal
- Allows deal to potentially continue at original price
Cons:
- No guarantee appraiser will adjust valuation
- Can delay closing timeline
Cover Part of the Gap
The seller can choose to cover part of the appraisal gap in order to keep the deal on track. For example, if the gap is $20,000, the seller may agree to lower the price by $10,000 and the buyer covers the other $10,000.
Pros:
- Deal moves forward close to original terms
- Seller partially protected from low appraisal
Cons:
- Seller loses some money compared to original deal
- Buyer has to pay more than appraised amount
Cover the Entire Gap
As a last resort, the seller can agree to lower the selling price to the appraised amount and cover the entire gap at closing. Essentially they would sell at the original price but rebate the difference to the buyer.
Pros:
- Ensures deal closes at desired price
- Makes buyer whole on their end
Cons:
- Big financial hit for the seller
- Buyer gets home below market value
Walk Away
If the seller is unwilling to lower their price or cover any part of the gap, they can walk away from the deal. However, this should be a last resort, as it causes significant inconvenience for both parties.
Pros:
- Seller avoids an undersized sale
Cons:
- Deal falls through, wasting time and resources
- Buyer has to start search over
- Seller has to relist home
Request a New Appraisal
In some cases, the seller may request a completely new appraisal to be completed on the home. They will typically have to pay for this second opinion if they want another valuation.
Pros:
- Opportunity to get a higher appraised value
- Deal could still go through at original price
Cons:
- No guarantee second appraisal will be higher
- Delays closing timelines again
- Seller has to pay for second appraisal
Make Repairs to Justify Original Price
If the appraisal indicates required repairs, the seller can make updates to justify the higher price. For example, if the appraisal says the roof needs replacing, they may replace it and then request re-evaluation.
Pros:
- Opportunity to address issues hurting home value
- Could support original sales price after re-appraisal
Cons:
- Repairs cost money and take time
- No guarantee value will align with price after repairs
Request Buyer Covers Entire Gap
The seller can ask the buyer to pay the difference between the purchase price and appraised amount. However, the buyer is not obligated to cover the full gap.
Pros:
- Seller gets full desired price
Cons:
- Unlikely buyer agrees to overpay
- High risk of deal falling through
| Option | Pros | Cons |
|---|---|---|
| Lower Purchase Price |
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| Meet in Middle |
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| Request Reconsideration |
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| Cover Part of Gap |
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| Cover Entire Gap |
|
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| Walk Away |
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| Request New Appraisal |
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| Make Repairs |
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| Ask Buyer to Cover Full Gap |
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|
Tips for Managing an Appraisal Gap
Here are some tips for sellers looking to handle an appraisal gap smoothly:
- Communicate with buyer as soon as possible. Talk through options and preferences.
- Remain calm and flexible. Take emotion out of negotiations.
- Lean on real estate agent expertise. Agents have experience managing gaps.
- Understand true market value. Get multiple opinions if needed.
- Be open to compromise. Meeting in the middle often makes most sense.
- Act quickly if re-appraisal needed. Don’t let delays tank the deal.
- Make updates or repairs if required. Improving home can help justify price.
- Keep big picture in mind. Losing one deal isn’t end of the world.
- Consider covering part of gap if you can. Helps show buyer good faith.
- Don’t make knee-jerk reactions. Take time to weigh options carefully.
Seller Financing as an Option
One creative way for sellers to handle an appraisal gap is through seller financing. With this arrangement, the seller essentially acts as the bank and provides financing to the buyer.
For example, if there is a $20,000 appraisal gap, the seller could carry a second mortgage for the buyer at an agreed upon interest rate. This allows the transaction to complete at the originally agreed upon price.
Seller financing removes the low appraisal obstacle and can help deals move forward. It also gives the seller reassurance they’ll get their full price eventually.
However, the seller takes on more risk as a backer of the mortgage. There also may be more complex legal considerations with this route.
Benefits of Seller Financing
- Buyer can pay agreed-upon price
- Seller gets full desired amount
- Win-win solution for both parties
- Creative way to bridge gap
- Seller can earn interest
- More flexibility than traditional financing
Drawbacks of Seller Financing
- Added risk for the seller
- Potential for default if buyer can’t pay
- May be complex legal considerations
- Seller won’t get lump cash payment
- Ongoing relationship with buyer
- Reduced leverage if problems arise
The Appraisal Gap Challenge
Dealing with an appraisal gap can be frustrating and emotional for sellers. After finally finding a buyer, having a deal jeopardized by something out of your control is difficult.
It’s important for sellers to keep communication open with buyers and real estate agents when navigating this. Remaining calm and looking for compromise is key. If reasonable solutions still don’t satisfy all parties, it may be best to walk away and wait for a better match.
Appraisal gaps present obstacles, but they aren’t necessarily deal-breakers. Sellers who stay flexible and creative can often figure out a way to bridge the gap and continue toward closing.
This article discussed the following ways sellers can handle appraisal gaps in today’s market:
- Lower the purchase price
- Meet in the middle
- Request appraisal reconsideration
- Cover part or all of the gap
- Walk away from the deal
- Get a new appraisal
- Make repairs to justify the price
- Request the buyer covers the full gap
- Offer seller financing
With persistence and creativity, sellers can find solutions that allow deals to complete and buyers to get into their dream homes. Though appraisal gaps are frustrating, they can be overcome.