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The Appraisal Gap in a Hot Housing Market Explained: What strategies can a Buyer utilize to compensate for the missing financing?

Posted by Jim Emerson

Aug 6, 2021 10:51:41 AM

Whether you're a first-time buyer with no experience in real estate transactions, no experience obtaining a mortgage to purchase a property, or you are an expert looking into buying in a hot market; you'll want to know all about the Appraisal Gap. 


This blog will tell you a few things about appraisal gaps and what to do when facing one.


What is an Appraisal Gap?

An appraisal gap is a difference between a buyer's offer and the actual appraised value of the property they want to buy. It occurs when the former is greater than the latter. An appraisal gap is an issue most commonly experienced by buyers in hot housing markets because it can be challenging to write an offer that stands up against all the competition. There are competitive markets where bidding wars and other aggressive offer strategies are common and can cause a potential buyer to face an appraisal gap before closing. 


Are Home Appraisals Accurate?

Appraisals are subject to the ever-changing real estate, but appraisals done by a licensed appraiser are accurate in most instances. Appraisers look at the available data and use their professional judgment to estimate a value. If the property you want to buy sells below or above the asking price, the appraisal can go both ways. What makes a house sell for more money is significant demand and a smaller supply of homes. Read more about this here.


What Happens When the Appraisal is Less Than Your Offer?

Buyers end up with an appraisal gap when the appraised value comes in less than what the buyer initially offered to pay. It is necessary to understand that offers are legally binding. This means that even if the offer is less than the appraised value, the buyer must pay the seller the amount of money equal to the offer. But a bank most likely will only issue a mortgage for the appraised value, and thus a buyer might face a shortfall of resources to close the purchase. In this case, the buyer will need to find a way to pay the difference between the appraised value and the purchase price beyond the down payment and the approved mortgage line. Otherwise, they might face paying the penalty for not being able to close on the transaction.


What To Do in Case of an Appraisal Gap?

A buyer enters a challenging situation once there's a positive appraisal gap (the offer is larger than the appraised value). Suppose you ever get into such a situation. In that case, there's almost no way out other than paying the seller the total amount equal to the offeror paying the penalty for not closing the transaction. So, you'll have to arrange your finances. Here are some ways in which you can pay for the difference:


A. Pay with Existing Cash

This may be doable when the appraisal gap is only a few thousand dollars, and you have this amount in, for example, a savings account. Spending this money should not affect your cash flow significantly. However, not everyone has tens of thousands of dollars in savings or assets that they can sell to get fast cash when purchasing a house (mainly because most people use their savings for the down payment). In any case, you have a few more options.


B. Renegotiate with the seller

Sometimes this strategy will work, and at other times it won't. There's a chance they might be willing to accept a lower offer on the home. Renegotiating is possible, especially if they've already moved out and bought another property. Another scenario in your favor would be that you are in a buyer's market, and there's little demand for the property for which you made an offer above the appraisal value.


C. Pledge another real estate

Another option for covering the shortfall between the appraisal value and the purchase price is pledging another real estate the buyer may own free and clear of liens. For example, suppose the buyer is a real estate investor and owns several rental properties free and clear. The buyer can pledge one or more of their rental properties to make up the difference.


DC. Obtain a Loan From the bank, you can try to obtain a personal loan in parallel to your mortgage, so you might consider asking a financial institution. However, institutions such as banks conduct thorough background checks and have stringent credit scores requirements before they give you a loan. It's overall a long process, and we won't suggest that you go down this path.


We have some valuable advice for you. Read on to find out more.


1. Contact a Private Money Lender

Perhaps, the best advice anyone can give you is to contact a private hard money lender. Mortgage investors usually prefer hard money lenders instead of financial institutions such as banks for obtaining their house purchasing loans. The primary reason for this is that private money lenders process the loans much faster and are ideal if someone quickly requires a loan. Also, hard money lenders have less stringent requirements and background checks and understand clearly that you are facing an appraisal gap and can work with you to overcome the gap. 


The Bottom Line

If you're facing an appraisal gap in the Texas real estate market, you need to look for private money lenders. Choose AMI Lenders if time is critical for you, as we are one of Houston's fastest closers. We fund our hard money loans for investors and can move as fast as the law allows. Borrowers in Houston will also have difficulty finding lower rates for hard money or private loans than those we offer. We want our customers to succeed and take advantage of the financial opportunities provided by real estate investment. Visit our website today and fill out an application for a private loan.


Visit our website today and fill out an application for a private hard money loan in Houston.

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For over 30 years, AMI Lenders have been providing financing options to individuals in the Houston area. If we aren't able to assist you, we'll be happy to direct you to someone who can. 

Contact us for any questions or apply online!

Topics: hard money lenders, Financing for flipping houses, private money lenders in houston, AMI Lenders


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