An appraisal gap happens when a home appraises for less than the purchase price. Buyers can either protect themselves or the deal, depending on their goals. Here’s a look at common strategies and what they mean for sellers, too.
Managing the Risk: Types of Appraisal Gap Coverage
Buying a home is a significant financial decision, and, understandably, buyers want to limit their financial exposure in the event of unforeseen circumstances. That’s where appraisal gap coverage comes in. For the cautious homebuyer, two tools can safeguard their wallet:
- Appraisal gap addendum: A set dollar amount that the buyer agrees to cover in cash to make up the difference, ensuring the sale can proceed within the buyer’s financial limits. This is a separate document added to a purchase agreement.
- Appraisal gap clause: This language is included in the purchase agreement and uses a percentage instead of a fixed dollar amount, providing the buyer with more flexibility.
Both of these options help risk-conscious buyers protect their finances while still staying in the game. Since they offer more flexibility, buyers often use these tools in less competitive markets.
Full Buyer Commitment: Waiver vs. Guarantee Clause
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In highly competitive markets, some buyers choose to absorb all of the risk to make their offer more attractive. To do this, buyers typically rely on one of two strategies:
- Appraisal gap waiver: A clause in a real estate contract where the buyer agrees to cover the appraisal gap costs in full, but is not required to show proof of funds. In this case, the buyer relinquishes the right to renegotiate and must find a way to cover any gap amount out of pocket or through alternative financing.
- Appraisal guarantee clause: Also known as an appraisal gap guarantee, this language is included in the purchase agreement and guarantees the full offer price, providing proof that the buyer can cover it in cash.
These are aggressive strategies often used to win bidding wars or attract sellers in tight markets.
TAG Perspective: Our team observed this play out often in 2020, during the height of the COVID-19 pandemic. Homes were selling well above asking price, and buyers were frequently offering to cover the full appraisal gap to secure a deal in a fast-moving market.
Appraisal Gap Examples
Real situations make it easier to understand how each appraisal gap strategy plays out. The table below helps buyers and sellers quickly compare options and choose the right approach that best fits their goals, market conditions, and available funds.
Term
Buyer Impact
Seller Impact
Example Scenario
Appraisal Gap Addendum
Limits buyer risk
Provides partial security
Buyer agrees to cover up to $10,000 if appraisal fall short
Appraisal Gap Clause
Moderate buyer flexibility
Terms vary
Buyer adds a clause stating they’ll cover a 5% shortfall
Appraisal Gap Waiver
The buyer takes full risk
Strong seller protection
Buyer waives right to renegotiate, proceeds regardless of value
Appraisal Guarantee Clause
Full buyer commitment
Guarantees full sale price
Buyer guarantees the full offer price, even with a low appraisal
These options exist because every buyer’s journey is unique. When selecting the type of appraisal gap coverage that best suits your needs, consider both your financial risk tolerance and current market conditions. If you’re facing an appraisal gap, the TAG team is here to help you understand your options and move forward with confidence.
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