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What Is an Appraisal Gap?

An appraisal gap occurs when a home’s appraised value is lower than the price agreed upon in the sales contract. To handle this situation, many buyers include what’s called an appraisal gap clause in the contract. This clause states that the buyer agrees to cover the difference—up to a certain amount—between the appraised value and the purchase price if the appraisal comes in low.

If you’ve ever wondered what happens when the appraisal doesn’t match the agreed price, you’re not alone. That’s exactly where this clause comes in. It offers a middle ground between waiving the appraisal contingency entirely and relying on it to walk away from the deal. In this guide, we’ll explore what an appraisal gap clause is, how it works, and why it can be a useful tool in today’s market.

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What Is an Appraisal in Real Estate?

An appraisal is a professional estimate of a home’s value, usually conducted by a licensed appraiser. Lenders require appraisals to make sure the home is worth the loan amount. This applies to purchases, refinances, and lines of credit like HELOCs.

When a buyer and seller agree on a price, the lender then needs to ensure the home supports that price. Appraisers assess the home’s value to confirm the bank isn’t loaning more than the property is worth.

Since appraisals are based on professional opinions and local data, values can vary. Different appraisers might give slightly different valuations, especially in changing markets.

How Does a Real Estate Appraiser Determine Value?

Appraisers assess a home’s market value by comparing it to recent sales of similar homes, often called “comparables” or “comps.” These properties are similar in size, location, and features.

After a home goes under contract and passes inspection, the lender will order an appraisal. The appraiser reviews the property and compares it to recent sales in the area to determine its value. This process helps lenders make informed decisions about how much to loan on the property.

In fast-moving markets, appraisers can be caught between rising offer prices and lagging data, making their job more challenging.

What Is an Appraisal Contingency?

An appraisal contingency is a clause in the contract that allows the buyer to walk away or renegotiate if the home appraises for less than the agreed price.

For example, if a buyer offers $400,000 but the home appraises for $380,000, the lender may only approve financing based on the lower amount. This leaves a $20,000 gap that needs to be addressed for the deal to proceed.

Without a plan to cover that gap, deals can fall apart, which is why appraisal contingencies and gap clauses matter.

How Does an Appraisal Gap Clause Work?

If an appraisal comes in low, the buyer either needs to renegotiate with the seller or bring additional cash to closing. An appraisal gap clause preemptively solves this issue.

For instance, if the buyer agrees to cover up to $20,000 of any difference between the appraisal and the agreed price, the deal can still move forward smoothly—even if the appraisal falls short.

This clause gives sellers more confidence in the offer and helps prevent delays or cancellations due to a low appraisal.

When Is an Appraisal Gap Clause Helpful?

Appraisal gap clauses are especially useful in competitive markets. When multiple buyers are bidding on a home, offers often exceed listing prices.

Appraisers, who rely on recent sales data, might not support the elevated prices with their valuations. If the appraisal is low, deals can fall apart unless there’s a plan to handle the shortfall.

Buyers who can afford to cover a gap often use these clauses to strengthen their offers and stand out in bidding wars.

How Do You Include Appraisal Gap Coverage in a Contract?

Appraisal gap clauses can be customized in several ways, and a good real estate agent will help structure one that fits your needs.

Rather than committing to cover the entire difference, most buyers set a limit. This way, you know exactly how much extra you might need to bring to closing.

Here’s an example of a typical clause:

“If the property appraises for less than the purchase price, the buyer agrees to pay up to $20,000 above the appraised value, not to exceed the total purchase price.”

This protects both parties and gives everyone more certainty moving forward.

What Other Strategies Help Win Competitive Offers?

In tight markets, buyers and their agents often use creative tactics to strengthen offers. These might include:

  • Offering a quick closing
  • Increasing earnest money deposits
  • Including escalation clauses
  • Waiving certain contingencies

 

After the pandemic, these strategies became common due to low inventory and fierce competition. Even as the market balances out, these tactics can still make a big difference when you’re up against other buyers.

Frequently Asked Questions (FAQs) About Appraisal Gaps

It depends on your budget and how competitive the market is. Work with your agent to decide on an amount you’re comfortable covering without putting your finances at risk.

If you can’t make up the difference and there’s no clause in place, the deal may fall through unless the seller is willing to renegotiate.

Yes. Your lender will only finance up to the appraised value, so you’ll need to bring the rest in cash. This can affect your down payment and closing cost plannin

It’s possible. If the appraisal is much lower than expected, a motivated seller might agree to reduce the price. But it’s not guaranteed—this is why gap clauses are helpful.

Yes. In competitive markets, sellers favor offers with fewer risks. A gap clause shows you’re serious and prepared, even if the appraisal is low.