Appraisal Gap

An appraisal gap occurs when the independent appraiser says the home is worth less than what the buyer and seller agreed to pay. For example, if the purchase price is $350,000 but the appraisal comes back at $335,000, there's a $15,000 appraisal gap.

This gap matters because lenders will typically only lend based on the appraised value. If the home is worth $335,000 according to the appraisal, the lender won't finance $350,000, which means someone needs to make up the difference.

In competitive markets, buyers sometimes offer to cover the appraisal gap, meaning they commit to paying the difference in cash beyond what the lender will fund. This is called an "appraisal gap guarantee."

An appraisal gap creates a real financial problem in the transaction. If it isn't resolved, the deal can fall apart. The parties typically have three options:

Renegotiate the purchase price down to the appraised value. Request a second appraisal or file for reconsideration (if there's a legitimate reason). Or the buyer brings additional cash to close the gap.

Understanding this in advance helps buyers decide how much risk they're comfortable taking, and helps sellers understand why pricing matters.

A buyer offers $320,000 on a home, and the seller accepts. The lender's appraisal comes back at $308,000. The lender will base the loan on $308,000. The buyer now needs to decide: renegotiate the price with the seller, bring an extra $12,000 in cash to closing (beyond their original plan), or walk away using the appraisal contingency.

"A low appraisal automatically kills the deal."

It doesn't have to. An appraisal gap is a problem to solve, not necessarily a deal-ending event. Many transactions with appraisal gaps close successfully; they just require negotiation and flexibility from one or both parties.