Most Miami condo buyers and sellers may have recently heard the term "appraisal gap" but may not know its meaning. An appraisal gap is a real estate term used to describe the difference between the estimated market value of a property and the appraised value. The appraisal gap can be caused by several factors, such as the current increases in prices in the Miami, FL market. Buyers and sellers in Miami need to be aware of the appraisal gap and its effect on their transactions.
In this article
What is an appraisal?
What is an appraisal gap?
How does the appraisal gap affect buyers?
How does the appraisal gap affect sellers?
What can be done to close the appraisal gap?
Examples of how the appraisal gap has affected the Miami real estate market
What is an appraisal?
The appraisal is a process by which a qualified professional appraiser determines the value of a particular property. To estimate an estimated value, the appraiser will consider several factors, including the size, condition, location, and recent sales of comparable properties.
The appraisal is typically used as part of the mortgage lending process for the lender to determine how much they are willing to lend to the buyer. But appraisals can also be used for other purposes such as divorce or estate planning.
What is an appraisal gap?
When a property is appraised, the appraiser looks at several factors to determine the property's estimated market value. These factors can include recent sales of similar properties, the condition of the property, the location of the property, and more. The appraised value is supposed to be an accurate representation of the property's current market value.
An appraisal gap is a difference between a property's estimated market value and appraised value.
Contract Price - Appraised Price = Appraisal Gap
For example, a condo is valued at $800,000, but the appraised value comes in at $750,000. The appraisal gap, in this case, would be $50,000.
If the buyer depended on the appraisal value to get a loan, they may not be able to finance as much as they need and would have to make up the difference out of pocket. On the other hand, if the seller counted on the appraisal value to determine their bottom line, they may need to lower their expectations.
How does the appraisal gap affect buyers?
Buyers can be affected by the appraisal gap in different ways. If the gap is large, it can cause the buyer to get cold feet and back out of the sale altogether. Additionally, if the appraised value comes in lower than expected, the buyer may have to bring more money to the table to make up the difference. This can strain their finances and may cause them to reconsider buying the property.
How does the appraisal gap affect sellers?
The appraisal gap can also affect sellers. If the appraised value is lower than the sale price, this affects the sale and sales afterward as their property won't appraise, so it may cause their pool of buyers to be smaller.
Additionally, if the appraised value is much lower than expected, the seller may have to lower their asking price to attract buyers. This can also cause a problem if the seller needs to sell their home quickly as they may not have time to wait for the market to correct itself.
What can be done to close the appraisal gap
A few things can be done to close the appraisal gap. For buyers, the first thing you would want to do is renegotiate, but if you're buying in a seller's market, it's a bigger chance that the seller will not entertain any price adjustments. The subsequent option buyers have to pay the appraisal gap difference. Lastly, you may have to walk away from the deal.
For sellers, it's essential to price your home competitively. If there is an appraisal gap on your property, you may want to adjust your price to make the deal happen. If you're in a seller's market, you may be able to go back on the market and find a cash buyer or a buyer that can pay the appraisal gap.
Examples of how the appraisal gap has affected the Miami real estate market
Cash is always king, and with prices increasing so quickly, sellers in Miami prefer cash buyers simply because they know that there's a good chance that the deal may fall through due to a low appraisal.
Buyers who can afford to buy properties cash make cash offers but get loans. The buyer is essentially making offers that aren't contingent on financing, which means if the buyer can't secure financing, they still have to purchase the property in cash.
I'm currently working with buyer clients who made an offer not contingent on financing on a condo that was priced pretty high. They were worried about the size of the appraisal gap, so they hired an appraiser to appraise the condo during the inspection period. Since condo appraisals typically are based on sales in the building, and there weren't many recent sales in the building, the appraiser went off of sales from 6 to 12 months prior, which didn't represent the current market. The report came back, and the gap was almost $600k!!
So the buyers were able to determine what to expect from the appraisal gap during the inspection period and could back out of the deal and receive their deposit back. The seller says she will wait for a cash buyer, or she may take the condo off of the market and wait for some sales to close in her building and relist. Remember, appraisers, go mostly off of recent sales for condo appraisals.
Conclusion
The appraisal gap can have several consequences for buyers and sellers. For buyers, it can mean having to bring more money to the table to buy the property or backing out of the sale altogether. It can mean lowering their asking price or finding a cash buyer for sellers. A few things can be done to close the appraisal gap, but it's essential to be aware of the potential consequences before entering into a real estate transaction.