Case Study: Strategy to Mitigate an Appraisal Gap

The appraisal process is a topic that comes up with almost every buyer. I talked about property appraisals in general on YouTube, but at this point, you may be more concerned with how my team reacts if your client's appraisal comes in under the offer price.

Here’s the deal: We aren’t reactive with appraisal gaps; we are proactive.

In a nutshell, an appraisal is ordered by the lender after an offer is accepted by the seller. A third-party home appraiser uses a standard protocol based on current market conditions to determine the value of a home. This appraisal value is used to determine whether or not the sale price of the home is accurate based on the home’s condition, features, and location.

An appraisal gap occurs when there is a difference between the fair market value determined by an appraiser and the amount the buyer agreed to pay for the home. This moment, when the appraisal comes in, can make everyone feel a little panicky. Appraisal gaps can be deal killers, but it does not mean the buyers have to pull out of the sale. It does mean we may need to negotiate with the seller or pay the difference out of pocket. This is why it is crucial that the buyer's entire team has a strategy in place should the appraised value come back short of the purchase price.

Here is an example of a strategy my team recently developed with the buyers and their real estate agent.

These wonderful buyers were already a bit defeated after losing out on multiple properties. For this home, we knew that the buyers needed to be concise, confident, and direct in their next offer. The buyer’s agent ran data and looked at comps to understand the neighborhood they were interested in, and then the buyer decided on their final price which was $40,000 above asking. After a tour of the property, they put in their offer. The team submitted the contract and won! The next step was the housing appraisal, but here’s a key piece of information: the buyer had waived their appraisal contingency to win their bid.

Working in tandem with my team to understand the consequences of an appraisal gap, the buyers were prepared and knew they had three solutions if the appraisal came back lower.

1. Bring the Difference to the Table via our Appraisal Gap Strategy (AGS) Total Cost Analysis (TCA). The appraiser completed their opinion of value. They unfortunately came up only $3,000 above the asking price, which gave us an appraisal gap of $37,000. Now in most cases, buyers think that they will have to bring that amount to the table, but one of the things we modeled out for these buyers is what we call the AGS TCA.
   
   Simply put, we showed the buyers that, in the worst-case scenario, we could structure the mortgage in such a way that their cash to close would be the same while only increasing their payments by a fraction per month. This was our worst-case scenario if the two other solutions didn’t work. Thankfully, this worst-case was still a good solution and it put the buyers’ minds at ease through this part of the process.
2. Reconsideration of Value. The borrower submitted a reconsideration of value (ROV), which is a request to the appraiser to reconsider the analysis and conclusions of their appraisal based on information not presented in the appraisal report. The buyer’s agent prepared the ROV using comparative data before going under contract with a competent explanation. Unfortunately, the appraiser didn't agree. So, we had to go to the next strategy.
3. Second Appraisal. We knew that our offer price was not outrageous, so we ordered a second appraisal. Great news! The second appraisal came out at the asking price. WIN! Although we didn’t need to use our Appraisal Gap Strategy, we were prepared to do so if this second appraisal resulted in another appraisal gap.

An appraisal gap resulting from a low appraisal can happen under any market conditions. They are more likely to occur while home prices are high due to high demand and low supply, but appraisal gaps happen even when home values are falling. That is why it is critical that your client's entire home-buying team (including you!) is planning and communicating consistently throughout the process and preparing you ahead of time.

Do you have clients who are shopping for a new home?

Are they currently getting this type of scenario planning?

Send me an email at Leo@Anzoleaga.com with details about their situation. From there, we can build a personalized mortgage plan that includes strategies like this one.