Residential real estate transactions can fall apart at the last minute due to financing issues. Sometimes, buyers cannot obtain mortgages due to changes in their income or credit scores. Other times, the issue impacting their mortgage relates to the property, not the borrower.
Unexpected property defects uncovered during inspections can prompt lenders to refuse to finance a transaction. Appraisal gaps can also cause significant complications during real estate purchases. Appraisers sometimes determine that the home is worth less than the amount offered for its purchase.
When do buyers need to be particularly proactive about protecting themselves and their earnest money from the complications associated with a significant appraisal gap?
After market fluctuations
As real estate prices change based on economic factors, local demand, housing supply and other unique considerations, property values can rise and fall abruptly. Appraisers have to look at recent closings, which may mean that appraised values may lag behind the rest of the market.
After competing for a specific property
Sometimes, there is intense competition for a specific home. When buyers end up bidding against one another, the price that they offer may be a reflection of what they can pay rather than what the house is objectively worth. In those circumstances, buyers either have to cover the difference between the amount the lender agrees to finance and the sale price themselves or explore different financing options.
Including proper contingencies in offers and tracking the local real estate market can help protect people from the negative consequences of significant appraisal gaps. Buyers who are familiar with the issues that could complicate the closing process can limit their financial and legal exposure while bidding on houses.
