An appraisal gap is the difference between the contract price and a lower appraised value. Lenders base the loan on the lower of the two. So if a home under contract for $500,000 appraises at $485,000, someone has to deal with the $15,000 gap. The buyer can pay it in cash, the seller can lower the price, they can split it, the buyer can challenge the appraisal, or the buyer can terminate if the contract allows. Here's how I handle it, and how I explain it.
The short answer
The lender won't lend on value that isn't there. The gap has to be covered by cash, a price change, or both, or the deal ends under the contract's appraisal terms. Plan for it in the offer, before it happens.
Step by step
- Before the offer, look at the comps honestly. Is the price above what recent sales support? If so, talk about gap risk now.
- Decide on gap coverage. Can the buyer cover some of a gap in cash? How much? Put it in writing using approved language. Check with your managing broker.
- Know the appraisal deadlines. Your state's contract sets them. In Colorado, the CREC contract has an appraisal deadline and an appraisal objection deadline.
- When the appraisal comes in low, read it. Check the comps the appraiser used, the square footage, the features. Errors happen.
- Consider a reconsideration of value. Through the lender, submit better comps or corrected facts. Follow the lender's process.
- Lay out the options. Buyer pays the gap. Seller lowers the price. Split it. Change loan terms. Terminate if the contract allows.
- Negotiate quickly. Deadlines don't wait.
- Put the resolution in writing on the approved amendment.
A worked example (illustration only)
Contract price: $500,000. Appraisal: $485,000. Buyer putting 10% down.
| Before the appraisal | After a low appraisal | |
|---|---|---|
| Value lender uses | $500,000 | $485,000 |
| Max loan at 90% | $450,000 | $436,500 |
| Buyer's cash for down payment | $50,000 | $63,500 if price stays $500,000 |
The gap costs the buyer $13,500 more cash if the price doesn't move. Options: - Split it: price drops to $492,500, buyer brings $56,000. - Seller drops to $485,000: buyer brings $48,500.
Illustration only. A lender sets the real terms. Down payment shown only; closing costs not included. This is not an offer of credit.
How to explain it to your client
To a buyer:
"The bank only lends based on what the appraiser says the home is worth. If the appraisal comes in under our price, there's a gap. Either you cover it in cash, the seller lowers the price, or we meet in the middle. If none of that works, the contract may let us walk away by the deadline. Before we write the offer, let's decide how much of a gap, if any, you'd be comfortable covering."
To a seller:
"The appraisal came in $15,000 under. Any buyer using a loan will hit the same number unless we can show the appraiser better comps. We can ask for a reconsideration, or meet the buyer partway. Putting the home back on the market means starting over with the same appraisal risk."
Watch-outs
- Gap coverage is cash. Make sure the buyer has it, beyond down payment and closing costs.
- Don't promise a reconsideration will work. It sometimes does. Often it doesn't.
- Contact rules. Agents generally can't pressure appraisers. Go through the lender's process.
- Deadlines. Missing the appraisal objection deadline can waive rights.
- FHA and VA. Their appraisals can carry over to other buyers for a time and have specific rules. Ask the lender.
- Use approved language. Don't invent gap clauses. Check with your managing broker.
This is training for real estate agents. It isn't legal or lending advice. Use your state's approved forms and check with your managing broker.
Questions
Does a low appraisal kill the deal?
Not always. Many deals close after a price change or the buyer covers part of the gap.
Can the buyer get their earnest money back?
Often, if they terminate correctly under the appraisal terms by the deadline. Follow the contract.
Can we order a second appraisal?
Sometimes, depending on the lender and loan type. Ask the lender.
Does a cash buyer need an appraisal?
Not for a loan, but they can still choose one.
What's an appraisal gap clause?
Language where the buyer agrees to cover some or all of a gap. Use approved forms and get your managing broker's guidance.
Brian Lee Burke is the founder of PadLeaders, a Colorado real estate broker licensed since 2003, team leader of The Kenna Group at Keller Williams DTC (formerly Kenna Real Estate Group) and the author of Mastering Real Estate and The Real Estate Playbook. More about Brian.