A stronger offer with appraisal gap coverage

When a home is purchased with a loan, the bank will conduct an appraisal. Essentially, they want to know the true market value and make sure the purchaser has adequate equity in the home. Sometimes the appraisal comes below the contracted purchase price.

The bank will only loan on an amount based upon the lower of purchase price or appraisal. Purchase price is $400k but appraisal is $385k, then they use $385k. At this point you need to account for the extra $15k the bank will not loan you. You have options. Walk away from the deal. Pay the $15k in cash. Negotiate a lower purchase price. 

This situation, while not new, has come into play more over the past couple years as home values have grown rapidly. Sellers today are receiving multiple offers and combing through for the best one. Knowing a potential low appraisal could send the deal sideways, purchasers are looking for ways to appease the seller and assure a low appraisal is not a concern. 

Enter Appraisal Gap Coverage. The purchaser sweetens their offer by preemptively accounting for a low appraisal. Remember, you need your offer to be as pretty as possible and give the seller comfort that the deal will close. The purchaser writes into the contract they will cover the difference between purchase price and appraisal up to X dollars (or there is no set amount of coverage). Back to the example: purchase price is $400k, purchaser offers to cover up to $20k in appraisal gap (purchase price vs appraisal). The home appraises for $385k, which means the purchaser automatically will need to provide $15k extra in cash to purchase the home. If the appraisal was $375k, $5k more than the $20k offered with appraisal gap, then the purchaser can negotiate that $5k off purchase price, give the $5k more in cash needed, or walk away from the deal without penalty. 

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