Enter the appraisal gap. In a world of few available listed homes and many available buyers offering on those homes, the need proved the mother of invention. An appraisal gap is the essence of putting your money where your mouth is. While it may not give you whiter teeth and fresher breath, it will give you a definite leg up in the pool of real estate offers.

According to the National Association of Realtors, 87% of homebuyers finance their home through a bank or mortgage lender. When a lender offers to fork over that much money, they want some proof that the home is worth what the buyer has agreed to pay. Often, especially in this market, it is not. It likely will be, however, in the next 30 days with the rate at which home prices have been escalating, but that is a topic for another time. Either way, the bank ensures the value by ordering an appraisal from a third party. This appraiser determines the value based on certain variables in relation to the home. Put simply, the size, condition, age, number of bedrooms and bathrooms as well as certain improvements are all considered. The appraiser then compares this property to others in the area that are alike to determine a final value. Of course, there is much more that goes into this report with 25-plus pages of 4-point font lettering, but essentially, this is what it entails. A lender will not lend money for a home above what the appraiser determines as the value. Look back into history (2006-2007) for a lesson in why.

What happens then, pray tell, if a buyer offers $500,000 on a home that is listed at $429,900? Assuming the Realtor has done their job by determining value by pulling some of the same comparisons that the appraiser will likely pull to determine value, there could be a fairly wide gap between what the lender will lend and what has been offered. Blood out of a turnip has yet to prove viable.

This is the point where the buyer can offer, in writing, to cover that gap with cash for the difference if the appraisal comes in below what the offer price is. In this instance, if the offer price was $500,000 and the appraisal came in at $430,000, the buyer would need to bring an additional $60,000 in cash to closing to make up the difference. Chump change.

The truth is this is not at all an insignificant amount of money. Therefore, it is important to get this small detail in writing. While it is easy to write a contract for a smooth $70,000 over ask price, it is not so easy to produce that amount if the appraisal comes in low. I have spoken of this before, and not in favorable terms; however, the powers that be (the attorneys who write the contracts for Utah Realtors) have provided us with a formal addendum to address such matters. It is called the appraisal addendum.

This addendum serves as an appraisal guarantee. The language states that in the event that the property appraises for less than purchase price, the buyer agrees that the purchase price will not be reduced. But wait … there’s more. This addendum also provides a blank to fill in an amount for the “appraisal floor.” This means the property must appraise for the minimum of the “floor” or the purchase price can be reduced anyway. If this doesn’t make sense, don’t worry, it doesn’t make much sense to most of us as well. Essentially, if the offer price is $500,000 but the appraisal floor is $490,000, and it appraises for $440,000, then the initial offer of $500,000 means nothing because it didn’t appraise for a minimum of $490,000. In other words, the appraisal gap is only $10,000, which makes the offer $450,000 max.

Back to the toothpaste commercial … to win a bid on a home, the intent must be proven in the offer sans the appraisal “floor.” While not every home is going for a mere $70,000 over ask, some of the good ones are. The proverbial “Shelly” likes whiter teeth.

Jen Fischer is an associate broker and Realtor. She can be reached at 801-645-2134 or jen@jen-fischer.com.