An appraisal gap is the difference between the agreed upon purchase price and the value that the appraiser determines at the time of appraisal. For example if a seller accepts a buyer’s offer with a purchase price of $250,000 and the appraisal comes back at a value of $240,000, the appraisal gap is $10,000.

In this current market, there is a possibility for homes to appraise for less than a buyer is willing to pay. Appraisers use past sales as comparable properties in their reports. With the low inventory and amount of buyers competing for the properties on the market, market values are rising and it may be difficult for appraisers to find comparisons to support the value.

To overcome this obstacle, many buyers are offering appraisal gap coverage or guarantees in their offers to compete. What does this look like? In our earlier example, if the buyer included an appraisal gap coverage of $10,000 in their offer, the seller will get the full purchase price of $250,000. The buyers would have to bring an additional $10,000 (the shortfall of the appraisal) to closing in addition to their down payment and closing costs.

For more ideas on how to write a competitive offer check out this blog post.