Does your buyer have the funds to close the gap between appraisal and offer?

By Patricia Nugent

One of the dominoes in the domino effect of a sellers’ market is what those in the industry call the “appraisal gap.”

Buyers and sellers should understand this gap before any offer is made or accepted.

I recently sat down with local experts Mark and Denise Zervos, who own The Neighborhood Experts at Platinum Real Estate, for an in-depth explanation.

“When supply is low for housing and the demand is high, we know prices naturally rise,” she says. “Home prices are appreciating, which creates challenges to home appraisals. An appraisal gap is caused when buyers are willing to pay above asking price—higher than market data that is available for appraisers to support.”

Taking Emotion Out of the Transaction
It happens all the time. Buyers fall in love with a home, become emotionally attached and see it as “theirs.” They picture their family growing up in its walls and yard. After the first walk-through, they are already planning where to place their furniture. The thought of losing it to someone else escalates the dollar amount of what is rational for them to spend.

“On the other hand, unlike many home buyers, an appraiser’s job is to look objectively at a home’s value and remain unbiased,” she says. “His or her job is to make sure the lender isn’t loaning more money than the home is actually worth based on market value and past sales supporting this data. Their job is to protect the lender.”

The graph illustrated here shows that the gap between contract sale prices and actual appraisal prices has more than doubled over the past year, from 7% to 20%.

Why is the Appraisal Gap so Important?
In today’s hyper-competitive market, with multiple offers an everyday occurrence, buyers are offering to make up the difference between asking price and appraised price.

“So, it seems like the buyer who offers to do that would get the home, right?” she asks. “Well, it’s not that simple. As knowledgeable professionals, we need to determine if the buyer has the assets in place to cover the gap and fulfill the obligation. Oftentimes they say they do, but we go back to them and find out that they don’t. This could add several weeks to the process, and a seller might lose the other buyers in the meantime.”

Last-minute contracts can easily fall apart. Knowledge and preparation are key.

“The agent representing you as the buyer or the seller needs to be informed and educated on the questions to ask on your behalf,” says Denise. “This isn’t the best time to put your DIY skills at negotiation to the test. Our team at the Neighborhood Experts has key members, myself included, who oversee and help advise when these tricky situations arise.”

As a case in point, Denise says just last week she represented a seller in Eastlake who had three offers, each over asking price. All three made statements that they would cover the appraisal gap, however upon further investigation into their financial assets, only one of them could verify they could cover it.

“So, if we had gone with either of the other two offers, which were higher and may have looked more attractive at face value, we would’ve been stuck,” she says. “As Realtors, we go the extra step to know our clients and the other players in any deal. We are seasoned and able to foresee all the ‘what-ifs’ in any real estate transaction.”

Platinum Real Estate has offices in Northeast Ohio, Columbus and Florida. The new Platinum Center headquarters is located at 7200 Center Street in Mentor. To get more information, call 216-990-2100 or 440-974-7253 and visit YourNeighborhoodExpert.com