Dear Chuck,

We’re trying to buy a house, and our realtor suggests we sign an “Appraisal GAP” clause in our offer that is above the asking price. Should we do it? 

First-Time Homebuyers

Dear First-Time Homebuyers, 

For some, it is a crazy real estate market right now! A member of our staff is trying to purchase her family’s first home, which has required them to offer up to 20% over the asking price in a very competitive real estate market. When they texted me this question, I did not know what they were talking about since I have never bid above asking for a home we tried to purchase. It took some research to understand the implications of this new trend in real estate. 

Appraisal Gap

When a buyer makes an offer and the appraiser finds that the home’s value is less than the offer, a gap occurs. The home “doesn’t appraise” for the amount the buyer is willing to pay. When this happens, buyers may not find a lender willing to take the risk on a home that is valued for less than the purchase price. So the buyer must be willing to pay the difference in cash. An appraisal gap clause is an addendum to a contract confirming that the buyer will cover any difference between a home’s appraised value and the offer.

The rise of appraisal gaps is happening in parts of the nation where housing inventory is low and the demand for homes is high. Appraisals may not reflect the current value of a home. This happens when home prices accelerate fast. It gives sellers comfort in knowing a contract won’t fall through because of a low appraisal. It protects buyers from having to back out of a deal.  

When a home is appraised, buyers have several choices to make. They can:

• Accept the value then cancel the contract, or add a gap clause to the contract.
• Find another lender, and hope their appraiser values the property like you do.
• Renegotiate with the seller; this will be difficult in a seller’s market. 
• Dispute the appraised value. Underwriters may adjust after a second review due to current market trends, missed features or upgrades in the property that you point out, comparable sales that you can prove, or mistakes you find in the report. Disputes must be done in writing that’s polite, detailed, and to the point. Include verifiable evidence. 

Consider Your Options

With an appraisal gap clause in your offer, you must buy the home even if it appraises lower than your offer. I recommend you avoid this due to the possibility that a market correction could create a situation where you are “upside-down” on your home or have “negative equity.” This would mean that you owe more or have more invested in your home than it is worth. Another option is to cap how much you’re willing to pay to cover the gap. This prevents you from spending more than you can really afford. Far safer for the buyer is to request an “appraisal contingency.” If the appraised value does not match a buyer’s offer, he/she can back out of the contract and keep any earnest money. 

First-time homebuyers face many expenses other than the purchase of the home, such as moving costs, repairs, and upgrades or modifications to the house. It is wise not to overextend on the purchase price and deplete your savings. You will place yourself under enormous stress that can be unhealthy for your marriage and family. 

Even though you may be renting now, you have a place to live, more time to accumulate savings for your eventual purchase, and the opportunity to take advantage of a better deal should market conditions change.  

This is a good time to be patient and wait on the Lord. He knows your needs and will guide you to the best home for you in His time. 

“Delight yourself in the Lord, and he will give you the desires of your heart. Commit your way to the Lord; trust in him, and he will act.” (Psalm 37:4-5 ESV)

While you are waiting on the Lord’s plan in the purchase of your first home, if credit card debt is an issue for your family, Christian Credit Counselors is a trusted source of help. They can help your family get on the road to financial freedom.

This article originally published on The Christian Post on March 18, 2022.