The West Michigan real estate market can be relatively competitive. While it has cooled off somewhat when compared to a few years ago, many properties in high-demand markets, including Forest Hills and Rockford, sell rapidly and may receive multiple bids from aspiring buyers.
People hoping to acquire a specific property may want to bid aggressively to stand out from other buyers. In such cases, buyers may need to limit themselves to avoid the possibility of an appraisal gap derailing their mortgage financing and complicating their transaction.
What causes an appraisal gap?
Mortgage lenders generally require appraisals to ensure that they do not become overextended when financing a purchase. The appraised value usually needs to be roughly the same as or higher than the offered price for the property.
When the appraisal comes in lower than the proposed purchase price, that is an appraisal gap. Lenders may limit financing based on the appraisal or may refuse to finance the transaction when there is a significant gap. Buyers can avoid appraisal gaps by tracking market conditions in the neighborhoods where they intend to make offers.
They can also protect themselves from a loss of financing by coming to the table with a certain percentage of capital. The ability to tap into cash reserves to cover an appraisal gap can prevent it from causing a canceled closing. Otherwise, making offers that realistically reflect the fair market value of a property may be the only way to prevent an appraisal gap.
Buyers may need help crafting offers that limit appraisal gap risk and adding contingencies that protect them from financial consequences if an appraisal gap arises. The guidance of a real estate attorney can help buyers navigate pre-closing complications and minimize the risk of losing their earnest money.