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What Is An Appraisal Gap? (5 Scenarios To Know!) - YouTube
Channel: Win The House You Love
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all right you've likely heard of an
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appraisal gap and wondered is this
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something that i should do should add to
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my contract or maybe you've heard the
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term appraisal waiver and wondered how
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this is going to affect you if you
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either have one or go up against other
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buyers who are using appraisal waivers
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or appraisal gap clauses so i'm going to
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explain in this video how it works if
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you should use one and how it impacts
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kind of the whole home buying situation
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and market that we're in right now so
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basically let's talk about an appraisal
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first appraisal is when a lender they
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need to justify the value of the home
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that you're buying so let's say we're
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looking at buying a home for 425 000
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they're going to send an appraiser most
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of the time they're going to send an
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appraiser out to see if the home is
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worth that they need to justify that if
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they're going to give you a loan for
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you know close to 425 000 that the home
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is actually worth that if you end up not
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paying back the loan and they need to
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sell it so what ends up happening is
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sometimes appraisals can come in low and
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this is often referred to as a short
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appraisal when that happens it usually
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can kill the deal because you said you
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were going to offer the seller 425
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but then the lender won't give you money
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to be able to cover up to 425 000 if the
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appraised value comes in at let's say
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four hundred and fifteen thousand
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dollars that's ten thousand dollars
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short so what happens with an appraisal
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gap um or an appraisal gap clause
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sometimes people call it an appraisal
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waiver it's not an appraisal waiver
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we're not waiving the appraisal we're
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waiving the appraisal contingency
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so often in something like a purchase
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contract there is a clause that states
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if the home doesn't appraise that the
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buyer is able to back out of the
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contract meaning that if the home comes
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in at a lower appraised value you don't
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have to continue moving forward buying
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the house this gives you a protection as
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a buyer
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in a really competitive market having an
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appraisal gap clause or what people
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would call appraisal waiver or really
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just waiving the appraisal contingency
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it's called different things and it's
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confusing but what this does is it gives
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a little bit of incentive to the seller
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to say oh we might go with their offer
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instead because they're they're willing
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to pay extra money
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if the home doesn't appraise at the
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purchase price and so in this
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you're basically saying we'll pay extra
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money up front on top of our down
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payment and closing costs to be able to
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move forward with this so for instance
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you might have a real estate contract
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that you offer so when you give an offer
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to a seller you find a house that you
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like and say we want to offer 425 000
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and then you might add a gap okay and so
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for instance you could add a fifteen
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thousand dollar gap or you could add a
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ten thousand one or a five thousand
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basically what this means is if the home
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comes in let's say fifteen thousand
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dollars short in value you're willing to
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bring fifteen thousand dollars in cash
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to cover it okay so for instance on a
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425 thousand dollar purchase price here
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you'd be covering the difference if it
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came down to 410 000
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okay now you might ask how can i compete
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against something like this if someone
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puts in an offer like this you might be
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at the point where like you know the
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down payment closing costs are kind of
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really tight for us so we don't really
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have extra money
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and that is why people use these
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appraisal gap clauses is because it
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helps their offer stand out amongst all
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the other offers this is a way to make
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your offer more competitive if you have
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the flexibility with cash unfortunately
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it does make home buying more difficult
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for people who don't have the cash to be
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able to spend like this so let's look at
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an example here um so
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the
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the clause that gets written is going to
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be different based on your location all
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contracts are different locally okay but
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this is just an example of what this
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could look like it might be included in
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your contract or it may need to be a
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separate addendum
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with the contract so it might say if the
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property does not appraise for the
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purchase price the buyer agrees to pay
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up to twenty thousand dollars above the
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appraised value not to exceed the
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purchase price so something that simple
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that basically says if the home value
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comes in twenty thousand dollars
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lower at the appraisal you as the buyer
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are willing to pay 20 000
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at the closing table to make up the
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difference okay so
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let's talk about really quickly the
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solutions to a short appraisal because
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it's not just the appraisal gap that can
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help you with a short appraisal and
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short appraisals unfortunately are
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getting more and more common as home
[255]
values or well as people are offering
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more for homesite and home values do
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increase
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people are offering a lot more
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some and a lot of times than a home is
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worth in its appraised value okay and
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they're putting in these appraisal gaps
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so they might get a short appraisal
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coming in here are some solutions to fix
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this number one is we can ask the
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appraiser to reconsider the value with
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new comparable homes when you get an
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appraisal the appraiser is often looking
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at three homes
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that have recently sold
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within the past six months and a half
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mile radius that is
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usually what they're looking at
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your realtors either the buyer your
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agent or the seller's agent could submit
[298]
new comparables for the appraiser to use
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i haven't seen this be super successful
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as a strategy another option is you
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could get a new appraisal this only
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works on a conventional loan but you
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could actually switch lenders and get a
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new appraisal with that lender and
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you're kind of hoping that the value
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comes in it could come in lower so just
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keep that in mind
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option three is the seller reduces the
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price so you know back to our original
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example if you offered 425 and it came
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in at 415 the seller could drop the
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price to 415. odds are they probably
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don't want to do that
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the fourth option is you pay the
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difference you bring cash to the closing
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table to pay the difference here and
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this is what an appraisal gap clause is
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okay it's basically building in
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this fourth number four solution into
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the contract before the appraisal
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happens all these other solutions happen
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if the appraisal comes in short
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option number four is what people use
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they they kind of bake it into the
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contract to make their offer stick out
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number five is uh basically splitting
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the difference some people do this 50 50
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you might do 60 40 80 20 whatever the
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seller might come down a little bit and
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you as the buyer might bring extra money
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to the table
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one quick note here is you actually can
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use your down payment to help cover a
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short appraisal so if you have a down
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payment that's higher than the minimum
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down payment for instance on a
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conventional loan the minimum is three
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percent down if you're putting ten
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percent down we have seven percent of
[382]
wiggle room there where you can actually
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bring your down payment down to the
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minimum and use that extra percentage to
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cover the short appraisal that sometimes
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can work sometimes you can also
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remove seller credits to help cover that
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difference as well so several different
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options you can talk with your loan
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officer
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to explore these options too and if
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you're looking for a helpful loan
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officer i can give you an introduction i
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have a link down in the description if
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you are interested in that so next
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question is will lenders allow this
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because i know this can be kind of
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confusing where it's like why can't the
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lender just give me the money that i
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need
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lenders are going to look at the lesser
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of the purchase price or the appraised
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value they're going to look at the two
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and see which one is the lower one and
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they're going to use that as the actual
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value of the home and keep in mind the
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reason why they're doing this is if you
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you know the lenders are looking at risk
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so if in the future you don't pay on the
[436]
loan anymore and they need to foreclose
[438]
and sell the home they want to make sure
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it's actually worth enough to cover the
[442]
loan that they gave you
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if they gave you a loan for up to 425
[447]
000 but it's only worth 415 then they
[449]
took a loss on
[450]
on that there so they don't really want
[453]
that to happen
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so they're going to look at the lower of
[456]
these two
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so in this instance they're going to
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look at the 415 if the appraised value
[461]
is lower than the purchase price so then
[463]
your down payment is going to be based
[466]
on the lower value so if you're
[468]
initially putting five percent down and
[470]
initially you were going to be putting
[471]
five percent down on the purchase price
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well the appraised value came in lower
[476]
so five percent down is actually going
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to be based on the appraised value so on
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a 415 000 appraised value the down
[483]
payment is 20 750
[486]
okay so that sounds great well our down
[488]
payment went down that's that's awesome
[490]
but
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we still have to make up this difference
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because we're under contract to purchase
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for 425
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but the appraised value is only 415. so
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the lender's loan plus our down payment
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equals 415. we can give that to the
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seller
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but the seller still needs the 425
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and that's where we go back to you know
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these solutions that can help us resolve
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these here with the appraisal gap it
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builds in this number four option to say
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we're actually going to cover that gap
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up to a certain amount if it comes in
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short
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okay so keep in mind this obviously
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is going to cost money to put in an
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appraisal gap so a normal appraisal
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contingency gives you as the buyer an
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option out of the contract
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where if you say i want to buy the home
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for 425
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but it appraises at 4 15
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you can back out of the contract that's
[540]
what a normal appraisal contingency does
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it provides protection for you as the
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buyer if the value is shorter or is
[546]
lower than what you initially were going
[548]
to offer for it so this is a nice
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built-in protection to help you not
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overpay for a home
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most people need this protection that's
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why it's baked into uh every contract
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that i've seen has this clause this
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contingency in there to protect you as a
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buyer however an appraisal gap overrides
[566]
that protection and then guarantees the
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seller that gets paid at uh the purchase
[570]
price and you know this is like up to a
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specific amount right it's not an
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unlimited thing it's up to and you can
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specify this twenty thousand dollars
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twenty five thousand dollars three
[579]
thousand dollars whatever gap you wanna
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put in there obviously the bigger the
[582]
number the more competitive your offer
[585]
is okay so just as a quick example using
[588]
the numbers we've been using if we have
[589]
a 425 thousand dollar purchase price
[592]
let's say it appraises
[594]
10 000 short 415
[596]
our down payment is based on the 5 000
[600]
i'm sorry 5 percent down which is
[602]
seven 20
[603]
fifty dollars
[604]
now that's not the end of the story
[607]
we also have to pay the gap and let's
[609]
say in this instance we offered up to a
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fifteen thousand dollar gap
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but the difference is only ten thousand
[616]
dollars we're just going to have to
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bring the ten thousand dollars to
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closing so at the closing table
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you're going to be paying the down
[623]
payment twenty thousand seven fifty
[626]
any closing costs that you have as well
[628]
and
[629]
the appraisal gap difference that is
[632]
only if you have that appraisal gap
[634]
clause in your initial contract so just
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be extremely careful that if you do
[639]
decide to go forward with this you have
[641]
the money to be able to do this you have
[643]
the flexibility to be able to do this
[644]
and you're comfortable spending that
[646]
money if you need to okay so here's how
[649]
to add this gap to your offer you want
[651]
to set aside these funds before
[653]
please do this before
[655]
you make your offer and be really
[657]
comfortable with this decision knowing
[659]
that if you offer a gap for fifteen
[661]
thousand dollars you could have to pay
[662]
an extra fifteen thousand dollars at
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closing okay um my friend javier vidanya
[668]
uh who has a youtube channel uh which is
[670]
fantastic and you should go watch it and
[672]
check it out he calls this clutch funds
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and i just think it's a really great
[675]
word for it um clutch funds are kind of
[677]
these how these uh these funds that you
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have uh that help sweeten your offer a
[682]
little bit to make it
[683]
more appealing to a seller to choose
[685]
your offer over other offers and your
[687]
agent can help you uh explore
[691]
what what amount you need here in the
[693]
gap and if you're looking for a helpful
[694]
agent i can also make an introduction to
[696]
an agent link is in the description
[698]
if you'd like them now keep in mind
[700]
again
[701]
you have the down payment you have
[702]
closing costs if you're offering a gap
[704]
make sure you're budgeting that too but
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then don't forget things like your move
[708]
and expenses and
[710]
everything that's going to happen
[711]
between now and you moving into a home
[715]
make sure that you're extremely
[716]
comfortable
[717]
with this here because the appraisal gap
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clause or this appraisal waiver as
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people tend to call it uh is not for
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everyone
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in a quick side note there are appraisal
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waivers where an appraisal actually
[728]
doesn't have to happen on a home
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based on what the underwriting software
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says
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for some reason there's been this mix-up
[735]
where everyone calls appraisal
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contingency waivers appraisal waivers
[739]
and they're not the same thing
[741]
so just keep that in mind when people
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are saying appraisal waivers an
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appraisal is likely still getting done
[746]
they're just waiving the contingency
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usually up to a specified amount okay
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to add this to your offer you're going
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to include the appraisal gap language in
[755]
your purchase offer again this may be
[757]
included in your contract there may be a
[759]
line in there for that often it's
[761]
usually an addendum that your real
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estate agent is going to have to write
[764]
and submit with your offer so talk to
[766]
your agent please
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please make sure you're certain about
[770]
doing this this is a really great
[772]
strategy if you have the cash to be able
[774]
to do this most people need the
[776]
protection of the appraisal contingency
[779]
and at the same time that appraisal
[781]
contingency protection can make your
[784]
offer less attractive in a multiple
[786]
offer situation where the home that
[788]
you're looking at is getting multiple
[789]
offers on it okay just please be careful
[791]
talk with your agent really work these
[793]
numbers and say if we had to go you
[796]
think plan worst case scenario if we
[798]
have to use all of that money uh
[802]
make sure that you're comfortable with
[803]
them so are they a good idea
[805]
well number one obviously they can help
[807]
you win a bidding war if you're looking
[809]
at a home and it's getting 10 offers on
[811]
it
[812]
if the seller looks at your offer and
[814]
they see oh great if it comes if the
[816]
appraisal comes in short they're willing
[817]
to pay an extra ten thousand dollars to
[819]
make sure that we have that protection
[821]
you're basically adding a
[823]
protection for the seller to make your
[825]
offer more attractive that obviously is
[827]
going to help you when bidding wars
[830]
protects you as a built-in protection
[832]
right away from a short appraisal what
[833]
often happens if you don't have an
[835]
appraisal gap is if a short appraisal
[836]
comes in
[838]
it then is kind of your offer is up in
[840]
the air not only can you back out but
[844]
the solution on what to do next is kind
[846]
of up in the air it has to be dealt with
[848]
so it adds an extra layer of protection
[851]
in the beginning
[852]
um obviously the big downside is you
[853]
have to come up with extra cash you have
[855]
to have the extra cash to be able to
[857]
afford doing this and in a way you're
[859]
taking a risk on we might not have to
[862]
use it at all we might have to use some
[863]
of it or we might have to use
[865]
all of it
[866]
and the big risk here is this risk of
[869]
being underwater in your mortgage and
[871]
and under being underwater is um
[873]
is basically when the value
[875]
of your home is less than what you paid
[877]
for it okay so i made this quick little
[880]
illustration here to show
[882]
right here this is what you the purchase
[884]
price that you would have paid
[885]
and this theoretically is the value the
[887]
value could go up
[889]
but when we're planning long term it's
[891]
always helpful to look at both solutions
[894]
planning for things to go up is always
[895]
great because the numbers usually always
[897]
work in our favor but if we plan for
[899]
things to go down and we're comfortable
[900]
with what that looks like or we're
[902]
mindful of what
[904]
the negative options look like
[906]
it's a much better way to plan things in
[909]
the future so
[910]
if that's the case if you made this
[912]
little gap payment here
[914]
keep in mind the value of your home oops
[916]
that's an eraser the value of your home
[918]
could
[919]
trend downwards and that could bring you
[921]
into more of a gap here now what does
[923]
that ultimately mean ultimately means
[925]
it's going to be more difficult to sell
[926]
your home in the future if you sell your
[928]
home in the future you might need to
[929]
bring money to close or you might get
[931]
less money than you expected in the
[934]
beginning so that is a
[935]
possibility that you want to be mindful
[938]
of not a guarantee that the value is
[940]
going to go down there are plenty of
[941]
people
[942]
especially in the past couple years who
[944]
have put appraisal gaps
[946]
or they have paid over what a home is
[948]
theoretically worth to an appraisal and
[950]
they have ended up
[952]
making
[953]
tens of thousands of dollars in equity
[955]
and appreciation on their home just be
[957]
mindful of what could happen
[958]
um okay so some quick scenarios here
[960]
let's say we had a purchase price of 425
[962]
and we have a 5 000 appraisal gap so i
[966]
want to run through a couple different
[967]
scenarios with appraisals to show you
[969]
how this works
[971]
let's say that the appraisal comes in
[973]
higher than the purchase price and it
[975]
comes in at 430 000
[977]
this is
[978]
the ideal situation uh theoretically you
[981]
got a five thousand dollar discount for
[982]
the home the appraisal is saying the
[984]
home is worth 430 and you bought it for
[986]
425 you got a nice discount you never
[988]
had to bring any more extra money to the
[990]
closing table
[991]
if it comes in at the contract price
[994]
this is great too nothing happens that
[996]
gap of money is not being used at all
[999]
and a quick aside too like when you
[1000]
offer
[1001]
uh put in an offer with an appraisal gap
[1003]
clause
[1004]
you don't submit the money anywhere that
[1007]
is just saying if appraisal comes in
[1009]
short i'll bring extra money to the
[1010]
closing table that money doesn't have to
[1012]
be held by anyone
[1013]
or anything like that
[1015]
now let's talk about these scenarios if
[1016]
the appraisal comes in short
[1018]
let's say it comes in at four hundred
[1020]
and twenty two thousand five hundred
[1021]
dollars
[1022]
if that's the case then we have to use
[1024]
twenty five hundred dollars of it see
[1026]
how we're saying up to five thousand
[1028]
dollars
[1029]
okay if it comes in at 420 we have to
[1031]
use the full thing we have to use the
[1032]
full
[1033]
five thousand dollars
[1035]
so basically we're using the lender's
[1036]
loan plus our down payment plus the 5000
[1038]
taking all that and that's what we give
[1041]
to the seller and when i say we i mean
[1042]
this title company is going to do that
[1044]
for you but this is kind of more
[1046]
theoretical here if it comes in at 410
[1048]
let's say it comes super low
[1051]
and it's beyond what you said you would
[1053]
cover in your appraisal gap then this is
[1055]
that that contingency kicks in where you
[1057]
actually have that protection again you
[1059]
said you'd only cover up to 5000 but it
[1061]
came in a lot shorter than that and if
[1063]
that's the case you have the option to
[1064]
back out of the deal or circle back to
[1067]
the options to fix a low appraisal maybe
[1069]
we'll look at submitting new comparables
[1071]
maybe we'll look at getting a new
[1072]
appraisal or we look at the other
[1074]
options we can use to solve the short
[1076]
appraisal here now if you want to dig
[1078]
more into how to fix a short appraisal
[1080]
to be mindful of what you could run into
[1083]
and what you need to do in the future
[1085]
look at this video right over here
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