118. No. In theory the amount offered should have nothing to do with the appraised value. The appraisal is the common way banks, lenders and mortgage companies determine if the amount offered is fair, reasonable, and in line with what another unrelated party would pay for the same property.

If you buy a gallon of milk at your store every week for $3.99 and a friend asks you to lend them $5 to buy a gallon. What would you think? Why do you need $5 to buy a $3.99 item? $4 makes sense.

But then your friend explains they buy natural almond milk, and that's mormally $4.99. Now that you know more maybe it makes sense to lend the $5 now that you know it's the fair price for the product. 

In this case I'm suggesting you appraised the proposed transaction and decided you would lend the $5 after understanding that the friend was paying a fair price for the product - and not scamming you out of a $1. A silly example but similar to what lenders are trying to do by using appraisals.

119. Unless there is language added into the contract - the offer can be considered null, void, or terminated. This could be different in markets across the US. In general, the basic premise is the offered price must meet, or exceed the appraised value. 

120. Ahh, a great question! And one that actually is a positive for the buyer.

If the offer is for $100,000 and the appraisal comes back at $102,500. What happens? Nothing! The contract is unchanged. The offer written and accepted was $100,000 and the purchase price does not change because it appraised for more money. On paper, the buyer has knowledge that it is likely that they just purchased the property at a nice discount.

If you read a few of the other questions on appraisals, you'll likely pick up on the fact that appraisals are just estimates. Yes they are professional estimates, but the key word is always estimate. Approximate. Hypothetical. The real world facts are things, property, houses are worth what the buyer is willing to pay. Appraisals are the lender way to get a good idea if it's statistically within reason. A fair market value. 

On paper I consider it a huge win when appraisals come back HIGHER than the purchase price. I cannot find any statistics on the subject. But from talking to lenders it seems there are not a lot that come back higher than the contract. 

More often it is the opposite - there is a higher probability of a short appraisal. On the whole it seems about 980 of 1,000 appraisals are for the contract price. I'll guess 14 are short (less than the purchase price) and 6 are above the purchase price.  

In summary- appraisals over the contract price are infrequest, and clearly suggest a victory for the buyer.

121. Another great question. I would say most buyers likely have no idea whether this could be an issue. On the next level: I would say many real estate agents might not have a good grasp of the probability either.  Even your lender is not likely to know this ahead of time.

This is where (the Bishop opinion) having more information. More facts. More stats. More data can be super helpful. If you know what the house sold for across the street last week - is that helpful? Yes. If you know what the last three sold for last month in neighborhood (we'll say these are all good comps) is that helpful? Yes - 4 recent sales.

If you know what the last 12 sold for over the past 3 months - does that help? Sure. The more information you have - the higher the probability of being able to more accurately predict if your purchase or sale is likely to appraise.

The more you know (not guess) the better odds that you will be right, or correct. Notice it's still just odds, but the higher the total number of sales reviewed - the more likely you are to predict accurately. 

123. An appraisal gap is financial incentive, offered by a buyer, to pay a certain amount of money if the lender's appraised value is less than the contract price offered. An example might be: a home listed for sale at $399,900.  A buyer offers $406,000 in an effort for the seller to take, or select, their offer vs others - theoretically for less money. For the example we'll say the buyer is offering $6,100 of appraisal gap coverage. $406,000 -$6,100= $399,900. So in the example the buyer would be responsible to cover any or all the difference between the list price and the actual appraised value the lender gets reported back. If the property appraises for $406,000 or higher; the buyer has no added appraisal gap liability. If the property appraises for $405,000. The buyer would be responsible for the $1,000 shortfall on the appraisal. 

124.  An appraisal gap, when used, is a donation to the seller for the amount dollars offered by the buyer to cover a difference between the listed price and the contract price. It is used most often when a buyer offers more than the list price but that is not a required term - just the one where it is most often used. The offered appraisal gap is effectively a donation of funds to the seller. Are you in favor of people donating $1,000's and $1,000's of dollars to you? Of course! Who wouldn't be. Does it make financial sense to make donations to sellers? Some will answer yes because their desire to get a home. Or maybe a certain home, or school district is so strong . They are willing to hand over their own hard earned cash and savings. I am NOT a fan of appraisal gaps - a=t least not in favor of gaps where clients are in effect making donations to sellers. I believe the mission can be accomplished without donating to the seller. 

A key point to remember, is appraisals are done by lenders, banks, mortgage companies as a means of determining if the property is actually worth the amount a buyer is offering to pay. 

But while appraisals are based off other sales, of largely similar properties. It's still subject to a significant amount of variations in terms of what value the appraiser determines. If a newer home (<5 years old) is compared to a home 30 years older. Is this a good comp? Or comparable to use? It may not be. If the home being purchased is 1,500 square feet and a comp, or comparable sale property is 2,600 square feet - is this a good comp? 

Here is a real example of how varied comps can be, from a buyer transaction I handled. A home was listed for sale at $250,000. My own comps suggested it was worth $280,000 to $295,000. My buyer offered $272,000. But offer to purchase "as-is" meaning no repairs would be requested (as the house was in very good condition). The first appraisal came back at $247,000. Less than the listed price and far below the offered price. But among the comps were a modular home compared to a stick built home. And poor condition comps that were not even recent sales. So the appraisal was challenged. A new appraisal was done and the value came back at $272,000 - the list price. 

During the process the lender asked the buyer for the inspection and the inspection report was shared. When the lender's underwriter viewed the inspection they stipulated a few items needed to be repaired by the seller. But this contract was written and accepted "as-is" meaning the seller was not asked, nor expected to make repairs. 

Because of the impasse, the buyer opted to switch to another lender to still hope to make the purchase. The seller granted a little extra time. A new loan application was made and a third appraisal was ordered on the same home. So in a matter of 2-3 weeks the home was appraised three times. 

The third appraisal came back at $280,000 which was closer to my own estimate before the offer was made. The home closed and it ends with a very happy buyer. 

So a quick review: a home listed for for $250,000 appraised at $245,000; $272,000 and $280,000 in three separate appraisals done in about 2-3 weeks time. 

My own theory is to look at the past 1, 2 or three years. Also look closest at the last 2-4 months sales. Of largely similar closings and see how the subject property to be bought or sold compares. This will typically generate 50-150 total sales and 10-20 recent sales. 

More information. More data. More facts. All that evens more knowledge and greater confidence in the where true market value lies. 

125. The key point to remember, if you are the buyer. If you offer an appraisal gap. You are stating to the seller: if the property appraises for less than my offer, I will pay this gap amount out of my pocket.

You are stating: you will close on the purchase even if the lender's appraisal is less than the amount you have offered to pay (within the limits you've set in the contract). Meaning, you'll still get the mortgage, and close. Up to a certain dollar amount (the appraisal gap offered). 

The concept as a buyer is you are attempting to give the seller assurance that if the appraisal is lower than the contract price - you (from your own funds) will cover that difference. 

As an agent who works mostly with buyers here are my thoughts on whether appraisal gaps are "smart" for buyers. If I said: I'll give you twenty dollars and I need you to give me change - how may times would you agree if the change you gave me for my twenty dollars was three fives? (3 - $5's). I'll guess you'll continue to give me 3 $5's for as long as I continue you to cough up the $20. Why wouldn't you? Each exchange is a profit to you. If no reason other than my own stupidity. 

Now if we reverse the example, and you're handing me $20's and I'm handing you back three $5's; how long can you do that? Because I'll do it all day long. 

This is why I'm generally opposed to appraisal gaps if you are my buyer.

But, and there are often "buts" -  there are circumstances where my clients have used appraisal gaps as part of their offer. Had their offer accepted - but the appraisal came back at valuations where the gap was not needed because the home appraised at the contract value, and in a few instances - the appraisal was over the offer amount accepted by the seller. 

So in summary, I have no objections to buyers offering appraisal gaps when the gap dollars are not used. Otherwise, you're doing the 3-$5's for a $20 loss trade. 

So this is a huge reason I use the term "Know the Numbers" as part of my business slogan. Be smart. Know what the true value is likely to be.