When buying a home in Frisco, Texas, one term that may come up during the transaction process is the appraisal gap. This occurs when the appraised value of the home is lower than the price agreed upon in the purchase contract. Appraisal gaps are increasingly common in competitive markets like Frisco, where home values have been rising rapidly. For first-time homebuyers, understanding how to handle an appraisal gap is critical to navigating this scenario confidently.
What Is an Appraisal Gap?
An appraisal is a professional assessment of a home’s value conducted by a licensed appraiser. Lenders use this appraisal to determine the maximum loan amount they can approve. If the appraised value of the home is lower than the agreed-upon purchase price, the buyer may face an appraisal gap.
Example:
Agreed Price: $500,000
Appraised Value: $480,000
Appraisal Gap: $20,000
In this case, the lender will base the loan on the appraised value of $480,000, leaving the buyer to cover the $20,000 gap if they want to proceed with the purchase.
Why Do Appraisal Gaps Happen in Frisco?
Rising Home Prices
Frisco’s popularity, excellent schools, and proximity to major employers in the Dallas-Fort Worth area have led to rapid increases in home prices.
Offers above the asking price are common in competitive situations, sometimes exceeding the appraiser’s valuation based on historical sales data.
Low Inventory
A limited supply of homes drives bidding wars, with buyers willing to pay more to secure a property.
Market Lag
Appraisals are often based on past sales data, which may not fully reflect current market conditions.
What Can First-Time Home Buyers Do When an Appraisal Gap Occurs?
1. Pay the Difference Out of Pocket
If you have the financial flexibility, you can cover the appraisal gap with additional cash. This ensures the deal moves forward without renegotiating the contract.
Pros: Keeps the deal intact in a competitive market.
Cons: Requires extra cash that might impact your budget for moving expenses or home improvements.
2. Negotiate with the Seller
You can request that the seller reduce the purchase price to align with the appraised value. While not always successful in competitive markets like Frisco, it’s worth exploring.
Pros: Reduces your out-of-pocket costs.
Cons: Sellers may be unwilling to lower the price, especially with other offers on the table.
3. Split the Difference
Another option is to negotiate a compromise where you and the seller share the burden of the appraisal gap.
Example: For a $20,000 gap, the seller agrees to lower the price by $10,000, and you pay the remaining $10,000.
Pros: Balances the costs between both parties.
Cons: Still requires additional cash from the buyer.
4. Include an Appraisal Gap Clause in Your Offer
When making an offer, you can include an appraisal gap guarantee clause. This shows the seller you’re willing to cover a specific amount of the appraisal gap, giving your offer a competitive edge.
Example: “Buyer agrees to cover an appraisal gap of up to $10,000.”
Pros: Strengthens your offer in a competitive market.
Cons: You’ll need to ensure you have the additional funds available.
5. Appeal the Appraisal
If you believe the appraisal is inaccurate, you can work with your lender to dispute it. Provide evidence, such as recent comparable sales (comps), to support your case.
Pros: Could result in a higher appraised value, reducing or eliminating the gap.
Cons: Time-consuming and often unsuccessful unless there are clear errors in the original appraisal.
6. Explore Financing Options
Some lenders offer programs that account for appraisal gaps, such as bridge loans or second mortgages. Discuss these options with your lender to see if they’re a fit for your situation.
Pros: Allows you to finance the gap without depleting your savings.
Cons: Increases your overall debt and monthly payments.
7. Walk Away
If none of the above options are viable, you may choose to terminate the contract (if allowed under the appraisal contingency in your offer). While disappointing, it’s better than overextending yourself financially.
Pros: Protects your financial health.
Cons: You’ll need to start the home search again.
How a Real Estate Agent Can Help
A knowledgeable real estate agent can make all the difference when dealing with appraisal gaps:
Accurate Pricing Advice: They can help you determine if the home’s list price is reasonable based on market data.
Strong Negotiation Skills: Your agent can advocate for you during appraisal-related discussions with the seller.
Appraisal Expertise: They can provide comps and other data to support an appraisal dispute if necessary.
Creative Solutions: An experienced agent will guide you through strategies to handle appraisal gaps without jeopardizing your financial goals.
Final Thoughts
An appraisal gap can be challenging for first-time homebuyers, but with the right strategies and support, it’s manageable. By understanding your options and working closely with a skilled real estate agent, you can navigate the Frisco housing market confidently and find the perfect home for your needs.
Please call us at 469-269-6541 for more details about Frisco real estate!
About us: Frisco New Construction Expert Real Estate Agent
As a Top Real Estate Professional in Frisco & Dallas area, I understand the challenges that arise when buying a new construction home. There are over 50 builders in the Dallas area. I work with most of the new home builders in Dallas and understand how various builders operate. I am familiar with the options they offer, current incentives and I frequently visit the upcoming communities they are building. I guide my clients through all steps of the new home construction process and aggressively protect their interests in the transaction.
As a holder of top real estate industry certifications and designations like CRS, ABR & GRI, I can offer my clients experience as a Buyer's Agent in Frisco and REALTOR®, top Industry Customer Service, in-depth, up-to-the-minute and comprehensive market knowledge; honesty, integrity, dedication, and professionalism in my business.
Whether you are a first time buyer in Frisco looking to buy a home in Dallas or Frisco or whether you are relocating to Frisco from California or moving your entire family from areas like San Francisco, Fremont, Palo Alto, Los Angeles, San Diego in California due to job transfer with your company, I can help you find a new construction home in Frisco. Our relocation team eases the transition - whether you are moving across town or across the globe. We will work with you to find an area that best suits your professional, family and lifestyle needs. We have all the tools you need to help your home search. Whether it is video previews of homes, extended work hours, digital signatures for documents or more, we can make this process as comfortable as possible no matter where you are located.
What is most important to you in your new construction home in Frisco? Send us an email at info@NitinGuptaDFW.com or give us a call at (469) 269-6541 to schedule a no obligation consultation. We’ll give you honest advice about Frisco community that you can use to help make your home buying decision.
