Press "Enter" to skip to content

Real Estate Expert Andrew Shader Explains Appraisal Gaps: Here’s What Buyers Should Expect as Trends Continue

Today’s low inventory and high demand are driving up real estate prices. But what does that mean, exactly? In this article, real estate developer and investor Andrew Shader will explore what every home buyer, investor, and developer should expect as appraisal gaps continue to grow.

An appraisal gap is the difference between the home’s appraised value and the buyer’s offer price. An appraisal gap is indicative of a seller’s market because lender appraisals are essentially dependant on comps (the price for which comparable homes in the area have sold). Increasing home prices drive comps up, but it takes time to reflect the higher prices.

As more homes are sold at higher prices, the comps will begin to reflect the higher value, and appraisal values will also go up. But in a hot market, the gap can continue to expand unchecked until it reaches a saturation point where the number of qualified buyers diminishes.

In a hot market, the list price for a home is often driven by emotion. Sellers hear of the crazy high prices and want to capitalize on the trend. They set their price high to see if they get any offers. Appraisal gaps act as a drag to keep hot markets from spiraling too quickly because most buyers, to qualify for a home loan, depend on an appraisal that is near their offer. But not all buyers have this restraint.

The commonly used strategy for protecting buyers from an appraisal gap is to include language in the home purchase contract that allows the buyer to limit what they are obligated to pay for the home to the appraised value or some specified limit — say 10 percent over appraisal. However, in a seller’s market, offers that tie the price to the appraised value may be rejected. The seller knows other buyers will not make that stipulation.

As appraisal gaps increase, home prices will begin to level off. Cash buyers and those with enough cash to pay the difference between the appraisal price and their offer will continue to support the higher prices, but this is a limited number of people, so the rate of increase for home prices will slow and steady.

You can also expect more sellers to get an independent appraisal before listing their homes on the market. Sellers don’t want to reject a qualified offer that is tied to the appraisal, so knowing what the house will likely appraise for is a significant benefit. Getting an appraisal on a home is not expensive, so it is often worth it for sellers that want to sell quickly.

In the end, the fact that appraisal gaps are a steadying influence on the market benefits buyers. It limits how quickly and how far home prices can rise because most homebuyers do so with a mortgage based on the lender’s appraisal.

About Andrew Shader

Andrew Shader is an entrepreneur and a successful real estate developer and investor in Fort Lauderdale, Florida. He got his Business Management and Marketing degree from Florida State University. After spending years in the insurance industry, Mr. Shader decided to shift his focus to real estate. Andrew specializes in value-added properties and boosting property value through investment.