Creating Competitive Offers: Appraisal Gap Coverage
Lately, the Colorado real estate market is seeing an extreme amount of home buyers fighting over a very small number of homes. This means that buyers are having to move very quickly and very aggressively to ensure that they are able to secure a great new home.
Denver Metro Association of Real Estate statistics from February 2021 indicated that sellers are currently receiving 101.9% of their asking price as a result of this supply and demand situation. And with home sales being higher than asking price, one of the most effective ways to remain a competitive homebuyer has been to offer the seller an appraisal gap coverage.
Let's start with appraisal. This is an unbiased opinion of the worth or value of a home produced by a hired professional (also known as an appraiser). There are several different methods appraisers use to calculate the value of a home, but what is important for home buyers to know is that your mortgage lender will only give you a loan up to the value of the appraisal. So let's do some quick math:
You offer $515,000 to buy a home that has an asking price of $500,000. Your offer gets accepted! WOOP WOOP!! Then, the appraisal value comes in at $500,000, just like the seller asked. OH NO!! Your lender will only give you a loan for that $500,000. So where is that extra $15,000 come from?
In a "standard" real estate transaction, this situation would call for a renegotiation of the offer contract to answer that question. Sometimes, the seller would lower the purchase price to match the appraisal. Sometimes the buyer would bring that difference in cash to the closing table. Sometimes there would be a "meet in the middle" solution, in which the seller would lower the price a little and the buyer would bring some extra cash to closing.
Because the market is currently so competitive, many home buyers are now offering what is called an appraisal gap coverage as part of their original offer. In a nutshell, this is basically a statement that indicates to a seller that the buyer will bring the difference in cash to closing no matter what the appraisal says. (There are many ways to do this, but this is just a basic overview. To find out all the different ways, send us a message and we can explain it more thoroughly).
Using this statement in the beginning, when an offer is first submitted, is very powerful, because the seller knows that they will be guaranteed their above asking price offer, no negotiation required, and they no longer have to have any stress or anxiety about this part of the home selling process.
Whenever you can provide the seller more profit and less stress, you have a great opportunity to find your offer at the top of the stack!
DISCLAIMER: Adding in an appraisal gap coverage does add risk to the homebuyer. You will need to discuss this option in detail with both your real estate agent (THAT'S US!) and your mortgage lender (WE HAVE SOME GREAT REFERRALS FOR THESE AS WELL). The appraisal gap coverage can only be written if you can financially afford to take this risk on and so that is where your trusty team of experts will play a major role!