Sander Scott explains appraisal gap guarantees, which help buyers cover the difference when a home appraises below the offer price. He walks through a numeric example, discusses when to use them in competitive markets, and warns about the risks involved.
Hey, DeeDee and I coming to you with information related to appraisal gap guarantees. So what is an appraisal gap, first of all? Well, it's a gap between the agreed-upon sales price in a purchase agreement and the appraised value done by a professional appraiser who gives a third-party unbiased opinion of value on that property. So banks are going to need appraisals, and the reason why appraisal gap guarantees are used when purchasing a home is the idea of competition. That if you really like a home and you're going to be up against possibly other buyers that are using cash, it's going to become really important then to compete with those cash offers because cash is king and cash buyers don't have to get appraisals. Even so that you, you may want to use an appraisal gap guarantee. So for example, let's say you're making an offer on a property. You know that there are other cash buyers out there. You really want to put your best foot forward. You've got $100,000 liquid funds available to you over and above what you'd use for your down payment on your loan. So you could give an offer of, let's say you're offering $500,000 on a property. You could say plus we'll give an appraisal gap guarantee of up to $100,000. So let's say worst case scenario happens and appraisals— you, you get it under contract and appraisal is done and it comes in at $400,000. That means now you've got to fill that gap between the $400,000 appraised value and the $500,000 purchase price. The reason why sellers like those is that deals fall through because if the appraisal can't come— doesn't support the purchase price, in other words, it's below the purchase price, then a buyer can say, "Sorry, I'm out. Wasn't able to get the loan because it didn't appraise," or they can try to use it to renegotiate a lower price. So appraisal gap guarantees should really only be used if you really, really love the property and you know you're up against cash buyers, because you could also be giving up as a buyer a leverage tool, a negotiation tool. So it's important to understand the dynamics of the buying situation. It's important to have an agent who's good and in touch with the seller's agent about What are the dynamics surrounding this? Are there competing offers? And, and in those competing offers, are any of them cash? So that's very often a discussion among agents as agents are trying to work out the best deal for their clients. And, and so anyway, appraisal gap guarantees can be a real useful tool, but they need to be used in specific situations only, but it's one tool that an agent ought to have in his or her toolbox when working with buyers, especially who really, really, really love a home, really, really want it, and are up against other cash buyers competing for that home. So these appraisal gap guarantees, were not really used up until this last crazy, crazy seller's market, and then they became used more and more. So if you're curious about appraisal gap guarantees or other tools to be used in the buyer process, just give me a shout. I'm here to help. Leave a comment. You want any real estate question answered, leave it in the comments and I'll make a new video to answer it for you. I'm here to help. Thanks so much.
