What is a rating gap in a real estate transaction?

If you need a mortgage to buy a home, your lender will likely need an appraisal. If this is the case, a home appraiser is hired to determine the home’s fair market value, which can lead to a valuation gap.

But what is a rating gap and what can you do if you find yourself in this situation?

What is a home appraisal?

A certified real estate appraiser determines the current value of the home on the basis of comparable sales data. The appraiser will visit the property to visually inspect, take photographs and take measurements.

A handy guide to home valuationsOnce the appraiser has personally viewed the property, he starts looking for comparable sales. They look for homes that are similar to the property in question by location, age, number of bedrooms, bathrooms, square footage, condition of the property, and more. Usually they only use sales that closed in the last 3-6 months. They will not use properties that are actively for sale on the market.

They will then select 3 comparable homes and adjust them if necessary. Common adjustments are for features such as number of bathrooms, square footage, and lot location. So if the subject property and the comparable property are nearly identical, but one has a larger square foot, an adjustment is made. In addition to the 3 comparable properties, an appraiser will usually include 3 additional comparable properties to support their comparisons.

All of this information is then gathered in the home appraisal to justify the appraised value for the home.

If you’re buying a home and there’s a valuation gap, you’re probably wondering what that is and if there’s a way around it, find out now! #taxatielgap #homebuying

What is a rating gap?

If the house is appraised for less than the contract price agreed between the buyer and seller, a ‘valuation gap’ will arise. It is also sometimes referred to as a low appraisal or appraisal shortfall, but whatever it is called, it can be a very big deal in a real estate transaction.

A appraisal gap can delay the home purchase, force the buyer to find extra cash, find new financing, or even terminate the purchase entirely. But if you are in this situation, you have some options.

What can you do if you have a rating gap?

5 solutions for a rating gapIf the valuation is lower than the contract price, you still have options. These include:

* You can pay the difference between the contracted price and the appraised value
* Renegotiate with the seller
* Ask for a review rating if you find any mistakes, however this is usually an exercise in futility
* Go to another lender for your mortgage, they will have a new appraisal carried out, but you may end up with the same appraised value
* Cancel the contract

The option to walk away from the purchase contract could mean losing your money earned, but if you have a contingency review it shouldn’t be a problem if you are within your contingency.

A closer look at closing the gap

If there is a difference between the contracted price and the appraised value, the best-case scenario is for the seller to lower the price to that value. If they can renegotiate with the seller, they can lower the price to the appraised value. Failing that, they may be willing to meet with the buyer halfway through to keep the purchase on track. But if there are other buyers in line, they may not be willing to return to negotiations.

There is the option for buyers to pay the difference. This can be a problem for some buyers, as their finances are often stretched to the limit with their down payment and closing costs, making it more difficult to find tens of thousands.

Questioning the appraiser’s assessment is also an option, but only if the appraiser has clearly made mistakes, otherwise it probably won’t work. Buyers can also look at other banks or mortgage brokers for finance, but they may still not get an appraisal that matches their offer, and it will further delay the home buying process.

Ultimately, the buyer may find the only option to walk out of the house and cancel the contract. If there is a review condition in the agreement, they will get their deposit back.

How does a valuation condition work?

What is a valuation condition?In hot real estate markets with rapidly rising house prices, comparable sales data may lag the current market situation. This is likely to lead to offers that are higher than the estimated market value and lead to assessment gaps.

A contingency appraisal written into the purchase contract allows the buyer to walk away if the appraisal value falls below the agreed price. Since the lender will not be willing to lend more money than its appraised value, the buying process will stall at this point.

If the seller is not willing to renegotiate the price, the buyer will be in a very difficult position, but the contingency appraisal offers a way out. When this contingency is triggered, the buyer will be refunded their genuine deposit and the purchase agreement will be cancelled.

Using a rating gap warranty clause

If there is a good chance that a valuation gap will arise, a clause can be included in the purchase contract that guarantees that the buyer will bridge the valuation gap. This is useful in a hot seller’s market when there is a lot of competition for houses and bidding wars are common.

The guarantee can make a buyer’s offer more attractive to sellers, but it does mean that they must be able to bridge the valuation gap. However, this could mean that a buyer may have to find more money than expected if the appraised value and the contract price are far apart. A maximum amount can be added to the clause, so that a buyer is not obliged to spend an unlimited amount to guarantee the valuation gap.

Final Thoughts

Valuation gaps can become common when real estate values ​​are rising rapidly, but there are no sales to support the price increase. This is where cash buyers can become king as they don’t need an appraisal. However, sometimes cash buyers think they have the upper hand by not needing an appraisal and will not make a competitive offer that is attractive to the seller. I’ve had a lot of funded buyers beat cash buyers because they made a strong offer that contained a rating gap clause.

Please consider spreading and sharing the word; What is a rating gap in a real estate transaction?

If you’re buying a home and there’s a valuation gap, you’re probably wondering what that is and if there’s a way around it, find out now! #taxatielgap #homebuying

About the author

Top Wellington broker, Michelle Gibson, wrote: “What Is a Rating Gap in a Real Estate Transaction?”

Michelle has specialized in residential real estate in Wellington, Florida and the surrounding area since 2001. Whether you want to buy, sell or rent, she guides you through the entire real estate transaction. If you’re ready to put Michelle’s knowledge and expertise to work for you, call or email her today.

Service areas include Wellington, Lake Worth, Royal Palm Beach, Boynton Beach, West Palm Beach, Loxahatchee, Greenacres, and more.

What is a rating gap in a real estate transaction?