When supply is low and demand is high, making an offer that really stands out among the competition can be tough, even when you’re able to submit a cash offer that has no financing contingencies.
When you find a home you really like it’s easy to go all-in on a bidding war but just because you have the highest offer doesn't mean it’s the most competitive.
Remember our Appraisal Gap post from last week, when it comes to appraisals the lender providing your mortgage will only consider the lower of the purchase price and appraisal value when deciding on how much to provide for your mortgage. So when the appraisal price is lower, this can reduce the amount of money you’re able to borrow, causing an appraisal gap. The larger the offer price, the larger the gap could be and sellers know this and might not accept your offer in fear of the buyer pulling out.
So when a buyer really wants a home what’s the best way to submit an offer?
Enter: Appraisal Gap Coverage
Appraisal gap coverage often referred to as an appraisal gap guarantee clause, is when the buyer agrees to cover any shortage between the offer price and the property’s appraised value.
In a hot real estate market, where offers over asking are the norm, writing this into your offer is a great strategy to beat out the competition. You can even include a specific number indicating how much of a gap you’re willing to cover.
Doing this will indicate that you’re a serious buyer, and sellers will feel more comfortable accepting your offer, knowing they don’t need to worry about an appraisal gap throwing a wrench into the closing process.
Let’s Consider an Example
You have great finances, a good credit score, and a healthy amount of money for a down payment. But – the market is red hot right now.
You find the perfect 3-bedroom home in the heart of Austin, Texas. It’s listed at $500,000, but there are multiple offers well above that. You know your offer has to be competitive and stand out among the crowd.
You decide to add in an appraisal gap clause up to $10,000 over the appraised value. In layman’s terms – if the appraiser says the property is worth less than the offer price, you plan to come to the closing table with an extra $10,000 upfront to cover that cost.
An Offer Without Appraisal Gap Coverage
Now let’s say your offer was accepted at $510,000 without appraisal gap coverage, but the home appraised at $500,000. There is a $10,000 difference. Without appraisal gap coverage, this would lead to further negotiations.
The biggest question is, who’s paying the $10,000? Will the buyer agree to pay all of it? Will it be split between the seller and buyer? Or will the deal fall through altogether?
That’s just an overall bad situation to be in. It requires more paperwork, stress, and work, with the possibility of the deal falling through hovering in the background.
But, if you initially went in with an offer that included an appraisal gap guarantee clause, there would be no confusion. You are guaranteeing to pay the first $10,000 over the appraised value. It’ll make your offer stronger, more attractive, and such a tool is a great way to make yourself stand out in a competitive market.
Offering to cover an appraisal gap is one of a number of levers buyers can pull to increase the attractiveness of their offer. In hot markets (like the one we’re in today), it’s important to understand what options are available to you to win the home of your dreams, without overpaying.