In a Changing Real Estate Market, Buyers Beware of Appraisal Gap Clauses

In times of house bidding wars, agreeing to an appraisal gap clause strengthened a potential buyer's bid. It assured the seller that even though the house appraisal is less than the final bid, the buyer will make up the difference in cash at the time of sale. In times when the real estate market was exploding and housing prices were on a constant rise, this was a safe bet for potential buyers. Today, however, with the Colorado real estate market cooling, home buyers need to be more cautious when agreeing to an appraisal gap clause.

Before entering into an appraisal gap buyers should do the following 3 things:

1. Ask your trusted realtor - Real estate agents have the resources and the experience to research the home's location and home value to determine market trends and will advise accordingly.

2. Ensure home appraisal is accurate - In times of market volatility, home comparables quickly become outdated. If an appraiser bases their estimate on outdated comparables, the assessment may be low, leaving the buyer on the hook for a high appraisal gap.

3. Make certain the appraisal gap payment does not your ability to afford the home - Many times, buyers will decrease the home downpayment to pay for the appraisal gap. A lower downpayment may impact home interest rates and increase monthly payments.