Considering that surprises intensify our emotions 400%, it’s fair to say that surprises are not for the faint of heart. Especially when you are buying a home, which can be an emotional experience to begin with, you don’t want the experience to be hijacked by a surprise.

With homes selling for more than their appraised value, some home buyers may find themselves surprised by what is called “the appraisal gap.” That’s the discrepancy that occurs when a buyer’s accepted offer for a home is higher than its appraised value.

In a balanced housing market, appraisal gaps like these are often negotiated with the seller agreeing to sell for the appraised value instead of the higher offer; seller and buyer meeting somewhere in the middle; or the buyer walking away from the property.

In the recent seller’s market, resolving appraisal gaps has fallen into the pocketbooks of the buyers who must be willing and able to make up the difference between the appraised value and their offer by bringing more cash to the table.

Let’s take an example. Say a house listed at $700,000 brings in multiple offers with the accepted offer going to the buyer who has offered $750,000. Unless the buyer has been made aware of current market conditions, he or she may assume that by putting down 20% or $150,000 as a down payment, the bank will loan them the other 80% or $600,000. What’s happening quite often in today’s market is that bank appraisals are coming in lower than the sales price, so in this example, the house is appraised at $700,000 which means the bank will only loan 80% of that value or $560,000. That leaves an appraisal gap of $40,000. So instead of just bringing in $150,000 cash to close the deal, the buyer must bring in $190,000.

Buyers need to be prepared for this type of “surprise” these days, and if you are working with an experienced Realtor, most likely you will be. That’s why it’s often wise in this kind of market to be looking at homes below your budget so you have some cushion of cash to bridge these appraisal gaps should they come up.

It also explains why all cash offers often win out in a bidding war. For the seller, there is less risk of the deal falling through should the house not appraise for the sales price.

Buyers may think that by “waiving the appraisal,” they can strengthen their offer in the eyes of the seller—one less hoop to jump through. However, sales contracts state that both the buyer and the property have to qualify for the purchase and if a bank won’t loan the amount that a buyer needs, then the buyer does not qualify and can walk away from the sale because he doesn’t have the cash. An educated seller, working with a professional Realtor, will understand this and will view all offers through this type of lens.

The moral of the story? In today’s Lake Oswego real estate market, you need to have realistic expectations of how much cash you may need to come up with to close a deal. Working with an experienced Realtor will help ensure that the only “surprises” you’ll have when buying a house will be pleasant ones.

I’d love to be that experienced Realtor to work with you in helping you buy or sell your home in Lake Oswego. Please give me a call at 503.939.9801, email me at costellok@hasson.com and/or check my website.

LAKE PRINTS FOR SALE

If you’re a lake lover like those of us in our family (or dreaming of becoming one someday), I wanted to introduce you to the lake prints my wife and daughter are selling on Etsy under their shop name, heartspun printables. These are instant downloads so once you purchase them, you receive jpeg files in your inbox which you can print at home or at your local printer. They come in a variety of sizes and colors so be sure to check them out!