Appraisal Gap Coverage

Appraisal gap coverage seems to be the theme of getting offers accepted in the 2021 Denver market. So what exactly is it, and why does it make an offer more appealing?

Right now about 85% of homes sell over list price with multiple offers. When a buyer offers over list, there is always a question of if the home will appraise at that price or not. An appraisal is an official valuation of the home and is required by the mortgage lender. A buyer is only able to get a loan for the appraised value that the appraiser determines.

With a financed offer, the appraisal is an important consideration to a seller because if a buyer offers over list, they want to ensure they will get all of their proceeds from that agreed upon purchase price, and not have to renegotiate or lower it if the appraisal comes up short.

Appraisal gap coverage can be written into an offer by a buyer and shifts the risk of a low appraisal from the seller to the buyer. It says 𝗶𝗳 the appraisal comes in lower than the purchase price, then the buyer will cover a set amount or the full amount of a 𝗽𝗼𝘁𝗲𝗻𝘁𝗶𝗮𝗹 gap between the appraised value and the purchase price in 𝗰𝗮𝘀𝗵 𝗮𝘁 𝗰𝗹𝗼𝘀𝗶𝗻𝗴. 

Say for example you have a house listed at 500k and the following offers:

• 525k w/ full 25k gap coverage

• 525k w/ partial (5/10/15/20k) gap coverage

• 525k w/ no gap coverage

Even w/ the same purchase price, the offers go from strongest at the top to least at the bottom in a seller’s eyes.

I’m the first to admit I don’t love gap coverage when representing buyers...but there are a few considerations to make:

• It may be necessary to be competitive and win a home

• Look at the long term investment/projected appreciation of the home + how long it would take to recoup that value

• It is a calculated risk + value isn’t black and white. Even when paying over list, if there is supporting data the home may appraise at the purchase price just fine, making the gap coverage a non-issue 

Sound like a lot? Buying + selling such a big investment definitely can be confusing...which is why you have someone help guide you through the process + your options! Questions? Send me a text or email!