I am starting to see more real estate sales contracts written with an appraisal gap clause. But what exactly is an appraisal gap clause. This is used to retain an appraisal contingency, but only up to a certain point. Let’s learn more about this, and other aspects of appraising a home.
Below is an example of language from an appraisal gap clause:
“Buyer will accept an appraisal that is up to $20,000 lower than the contract price.”
This way the buyer is putting a limit on their appraisal risk. When you waive an appraisal contingency completely you are risking 100% of the difference between the possible low appraisal and the contract price.
Give me an example
Let’s assume you offer $500,000 for a home and it only appraises for $470,000. You’d have to make up the $30,000 difference in cash if you waived the appraisal contingency.
But assume you have an appraisal gap clause capping the low appraisal to $20,000 below the contract price. If the appraisal is $30,000 below the contract price, then you only have to pay $20,000 in extra cash. Then you’d have another $10,000 gap that you did not agree to that you can attempt to renegotiate with the seller.
The seller can drop the price by $10,000. Or the buyer can choose to pay that last $10,000 in cash, raising their total to $30,000 in extra cash needed. Or if the seller won’t drop the price by $10,000 the buyer can invoke their appraisal gap clause and void their offer.
Waiving appraisal contingencies altogether
There are buyers that waive their appraisal contingency entirely. To understand what that risk means read, “Waiving Appraisal Contingencies.”
You can write an appraisal gap clause for whatever amount you are comfortable with. You should talk to your realtor about the anticipated appraisal. The realtor should provide comparable sales to support their opinion. But realize that assessing the value of a home is subjective. Finding comparables is a subjective process.
When an appraisal comes in low you can also consider an appraisal challenge. These can be challenging to have a positive outcome to raise the appraisal value. But it is always worth an attempt. However, appraisals are a grey are. Assessing the value of a home is more of an art than a science.
At the end of the day if you have an appraisal gap clause and the appraisal does not work out, you can always void the contract and move on.