With a continuing hot real estate market, many contracts are written with an appraisal bridge, or appraisal gap, written in. As a buyer this may be confusing and get overlooked when you agree to write this in. Let’s explain what this means and how it will affect your bottom line, or what you bring to the closing table in terms of funds to close.
Your realtor will add a line to the contract that may look like this:
“In the event the property does not appraise for at least the sales price, the purchaser hereby agrees to pay $_______________ over appraised value up to the sales price.”
Depending on the sale price of the property and the amount of money the buyer may have to contribute that blank will vary a lot. What does this mean to you, as the buyer. Well, this amount is the amount above your down payment and closing costs. The bank will only lend on the appraised value, and that’s minus your down payment. Again, the bank will ONLY lend on the appraised value, no matter what you’re willing to pay. This is to protect them, as they are the guarantor of the loan, so if you should be unable to pay, they will be able to recoup their money. I know, seems a little grim, but that’s just business.
So, let’s look at an example of what this might look like. Remember, you’re up against 2 or three others that might be offering contracts on this same property so you’ll want to put your best foot forward if this is the house you really want. Here’s an example of what you might have as a contract and what that looks like at the closing table:
The house lists at $250,000 and it’s fully updated and has everything you wanted, so you’re in love and ready to fight for this one. You offer $275,000 with 10% down and an appraisal bridge of $15,000 (hoping it appraises for $260,000 at least). There are many scenarios here that could happen, for one, it could appraise ‘at value’ meaning $275,000 and you have to come to the table with your original 10% down and closing costs, here’s what that looks like:
- This estimate is without lenders fees, as they vary and without your appraisal fee, that you paid for and does not acount for taxes that the seller may have pre paid for and from date of closing forward, you will pay them for.
Now, lets say that appraised at $260,000 and you had to bring the $15,000 that you promised to cover that cost. That’s $15,000 above the almost $30,000 you are wiring to close, so that’s $45,000 instead of $30,000.
Make sure you understand this before agreeing to it on the contract. That being said, this is the #1 line in the contracts right now that will get you that sale, so don’t omit it in hopes of paying less for the house, as it’s what’s winning in my market today. If $5000 is what you can bring to the closing table, of $2000, make sure you write it down and commit to it, that amount might win you that contract and get you into that house.
If you have any questions please feel free to reach out to me at middy@arbormove.com and I’m happy to help.
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