An appraisal gap occurs when a home appraises below the agreed purchase price -- for example, you offer $800,000 but the appraisal comes in at $750,000, and the lender won't finance that $50,000 difference. In a declining market, this happens constantly because purchase offers are based on older comparable sales while appraisals reflect current values.
Why Appraisal Gaps Exist
In a falling market, purchase prices are based on outdated comparables. By the time the appraisal is ordered, values have already declined.
Example: You offer $800,000 in March based on comps from January. It takes 30 days to close. In those 30 days, three similar homes sell for $755,000, $760,000, $750,000.
My appraisal is based on the April comps, not the January comps you based your offer on. Gap exists.
How to Handle Appraisal Gaps
Renegotiate purchase price — Ask the seller to reduce price to appraised value. In this market, many sellers will. They'd rather sell than wait.
Bring more cash — You can cover the gap with your own money. If gap is $50,000 and you have cash reserves, pay the difference yourself.
Walk away — If appraisal contingency is in your contract, you can walk. You're not obligated to overpay.
Wait it out — Some buyers wait hoping prices stabilize. Usually, prices continue declining. Not recommended.
The Renegotiation Conversation
When my appraisal comes in low:
"The appraisal is $750,000. Your asking price was $800,000. The market is supporting $750,000, not $800,000. Adjust accordingly."
Most sellers understand. They either reduce price or the sale doesn't happen.
Protecting Yourself
When you make an offer:
Include appraisal contingency — "Purchase is contingent on appraisal supporting the purchase price." This protects you if appraisal is low.
Don't waive it — Some sellers ask you to waive appraisal contingency. In a falling market, never do this.
Get appraisal early — Some lenders will order appraisal early, before you're fully committed. This shows you what the market actually values the home at.
Use recent comps — When making an offer, use comparables from the last 30 days, not 60-90 days ago. The market is moving fast.
Bottom Line
Appraisal gaps in 2008 are expected. Don't panic. Use the appraisal as a negotiation tool. The market will tell you what a home is actually worth.
Trust the appraisal. It's usually right.