What is an Appraisal Gap?

Posted by on Thursday, May 17th, 2018 at 12:05pm.

It’s no secret that the Denver real estate market is insanely hot right now. There’s a huge influx of people moving to the Centennial state and housing inventory simply cannot keep up with demand resulting in the highest prices this market has ever seen.

High housing prices are also impacting the rental market – rental rates are rising throughout Denver to astronomical levels. If someone had told me a decade ago when I was working as a Leasing Consultant that a 2 bedroom 1 bathroom house in a suburb of Denver would be going for over $2,000 a month I would have laughed at the thought. It’s very real today.

Generally speaking, once you go under contract the deal has 2 big hurdles to get through: the inspection and the property appraisal. We’ll be focusing on the second hurdle today. There can be a number of additional hurdles based on the terms of the contract but these 2 are the big ones that often make or break deals.

Appraisals are done by the buyer’s lender. They’re a safety net for the mortgage company to ensure that the property they are lending on is actually worth the amount of the loan. Appraisers come out to a property and inspect its condition, size, location, etc. and then they pull a bunch of comparable properties that have recently sold in the vicinity surrounding the property to try and determine the true market rate of the property.

If the property appraises for more than the agreed upon purchase price in the contract the deal goes through with the purchase price that has already been agreed upon. If the property appraises for less than the purchase price in the contract the mortgage company will only give a loan up to the appraised value. This is where deals run into trouble.

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