What is an “apprasial gap” in real estate?

What Is an “appraisal gap”?

An appraisal gap is the difference between the fair market value determined by an appraiser and the amount you agreed to pay for the home. An appraisal gap doesn’t mean you have to cancel the sale, but it may mean you have to negotiate with the seller or pay the difference for the home out of pocket.

What’s the appraisal guarantee clause?

Some sellers require what’s known as an appraisal guarantee clause written into the purchase agreement. This is common in a seller’s market (like 2021 and early 2022) where buyers outnumber sellers and sellers can call the shots. The appraisal guarantee clause states that the buyer will make up the difference out of their pocket if the appraisal is lower than the accepted offer.

For example:

Purchase price $400,000

Appraised value of $390,000

If you had an appraisal gap guarantee clause written into your purchase agreement, you would need to come up with the additional amount between the purchase price and the appraised value up to your max guarantee. For this example, let’s say you did have a gap guarantee up to $10,000. You would then be responsible for the full difference of $10,000 between the purchase price and the appraised value. That $10,000 would be additional funds paid to the seller on top of the down payment and closing costs the lender would require to close.