Title & Ownership April 7, 2023

Appraisal Gap Coverage or Guaranteed Appraisal

Hey everybody, it’s Stacie Duffy here, your Denver Metro Real Estate Resource. Just wanted to answer the question for y’all of what is appraisal gap coverage or a guaranteed appraisal? So it’s something that you may hear if you’re working with a realtor, or if you talk to a friend that just bought a house and it’s kind of a crazy seller’s market. It’s one of many multiple offer strategies. And personally I’m a huge fan of this especially if your buyer has a little bit of cash available. But essentially in rapidly appreciating markets, appraisers have a hard time justifying constantly increasing value. So if you think about it, when you look at a house and make an offer, that house is basing their price, hopefully off of some comparables in the neighborhood or some comparable properties. Those comparable properties may most likely have already closed, which means they were on the market and accepting offers four weeks ago at the soonest, usually up to six months ago or a year ago.

By the time an appraiser looks at a property, you’re a few weeks into the process and they’re having to look back at properties that sold a month ago or three months ago and compare price. If your market is rapidly appreciating on a month-to-month basis, it’s hard for them to justify that difference from something that was very similar and sold a month ago. Okay, why is yours worth more one month later? Some appraisal gap coverage is something you can offer a seller that can really help give them an insurance policy on that appraisal, so to speak. It’s not money that you have to spend or that you may have to spend, but let’s say, if the appraiser can’t get to value or for some reason it’s not, it doesn’t, your appraisal comes in a little bit low, you can offer that seller in your original offer from day one.

If the appraisal comes in low or lower than our purchase price, as a buyer, I will guarantee up to, $3,000 or cover $3,000 of that gap up to the purchase price if needed. You can cover up to 20,000. You can guarantee it no matter what, but just keep in mind your lender is only going to lend against a purchase price of what that appraisal came in at. So if it comes in low, the seller doesn’t have to sell to you, at least here in Colorado, they don’t. But you can offer to make up some of that difference. From day one, if you know they’re looking at six offers overall and yours is covering up to $3,000 of appraisal gap coverage, it can really make a huge difference because like I said, it’s a little insurance policy for them. So if you’re putting, 10, 15, 20% down on a property or have some extra cash available, consider making some of it available for that if needed. 

Obviously the property has to be worth it to you, but if a couple thousand dollars gets you into the property that much sooner and the one that you want, it’s probably worth it in the end. Definitely something to consider. Like I said, I’m a huge fan of that in a rapidly appreciating market or any seller’s market in general. But it just depends on what your situation is. It has to be a good fit for you. If you have more questions, I’d be happy to help. Please feel free to reach out and I’ll answer what I can here. It starts to get a little dicey without some agency relationship stuff.  My contact information is on my website. Thanks so much for the time and happy house hunting.