Why this happens and what to do

If you’re considering buying a home in today’s market, you need to be prepared for the possibility of a valuation gap.

A valuation gap occurs when the appraised value of a home is lower than the purchase price the buyer has proposed to pay. Valuation discrepancies are increasingly common in competitive markets like the ones buyers face today, and they can seriously complicate things if you’re not prepared.

“Today’s spreads are the result of market conditions,” says Will Hedrick, CEO of Speek Real Estate in Charlotte, North Carolina. “Because buyers are facing low supply, the market has become very competitive, driving prices up.”

This can easily lead to valuation discrepancies, sometimes large, of up to tens of thousands of dollars.

Read on to learn what a valuation discrepancy is, how it could affect your transaction, and four ways to resolve this scenario.

What is a valuation difference?

In real estate, a valuation gap can occur when an appraiser estimates that the value of the house is lower than the offer price that was agreed upon by the buyer and seller. For example, if a buyer agrees to buy a house for $400,000 but the property is valued at $375,000, there is a $25,000 valuation discrepancy that will need to be addressed in the transaction.

This is a problem because lenders will usually only cover a loan for a home‘s appraised value – so if that appraisal is lower than what the buyer has offered, the buyer is obligated to cover the difference.

How the Loan to Value Ratio Affects the Valuation Spread

Lenders use a loan-to-value ratio (LTV) to determine how much money they can put down for a loan. This LTV ratio is a percentage of the home’s value. Most conventional lenders like banks prefer an LTV ratio of 80% (or less), which means buyers must put down 20%.

Yet when an appraisal is low, the total amount lenders allow buyers to borrow changes.

Let’s say, for example, that the buyer has agreed to pay the seller $400,000 for a house and is willing to put down a 20% down payment of $80,000. This leaves the lender with an LTV ratio of 80%. It’s all beautiful and good.


However, if the appraised value is less than $375,000, the bank will only be willing to lend the buyer 80% of it, or $300,000. Yet, since the buyer has agreed to pay the seller $400,000, that would mean the buyer will need a total of $100,000 to cover the difference. In addition to the $80,000 down payment, the buyer will need to find an additional $20,000 to close the deal.

Best practices for managing a valuation gap

As you can imagine, most buyers aren’t thrilled about having to come up with thousands of extra dollars the moment they sit down at the settlement table. After all, not everyone has the cash to cover a big unexpected expense. Luckily, we’ve put together some best practices to help you overcome a valuation gap if one arises in your transaction.

Include a valuation gap clause in your offer

First, including a valuation gap clause in your offer is one way to address this situation head-on. By using this clause, you can explain to the seller what you are prepared to do if a valuation discrepancy occurs. For example, you could agree to pay the full amount of the difference or pay a fixed sum of money to make up the difference.

In short, including this clause in your offer can help you limit your exposure. Yet at the same time, since you’re willing to put some extra cash on the house, it will also help give the seller a better idea of ​​your motivation.

Request an assessment appeal

When you request an appeal of an appraisal, you are essentially requesting that the appraisal be redone by another neutral third party. The hope is that the new appraiser will think the property is worth more than the original appraisal figure. If so, you may be able to close the valuation gap.

However, there is no guarantee that the new valuation will be different. If you decide to go this route, ask your Real estate agent to provide comparables that support your proposed purchase price. This way you will be able to provide evidence to support your offer.

Renegotiate with the seller of the house

If there is a valuation contingency in your offer and your valuation is low, you will have the option of renegotiating the purchase price with the seller. That said, again, there is no guarantee that the seller will be willing to accept a lower price. Especially in a competitive market, the seller has very little incentive to do so.

Get away from home

Last but not least, if you have an assessment contingency, you are also within your rights to walk away from home. While this may not be the ideal outcome, if you don’t have the cash to cover the valuation gap and the seller is unwilling to budge on the price, this may be your only viable option.

The post office Homebuyer’s Guide to Valuation Gap: Why It Happens and What to Do About It appeared first on Real Estate News and Insights | realtor.com®.

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