Definition
An appraisal gap occurs when a home's appraised value comes in lower than the agreed-upon purchase price, which becomes a problem because lenders will only loan against the appraised value, not the contract price. When this happens, the buyer must either make up the difference in cash, renegotiate the price with the seller, or walk away if the contract includes an appraisal contingency. For a seller, an appraisal gap can derail a financed sale unexpectedly, even after weeks of what looked like a smooth transaction heading toward closing. Appraisal gaps tend to show up most in fast-moving, competitive markets where offers routinely climb above recent comparable sales. Knowing this risk exists ahead of time can help you decide whether to require an appraisal gap guarantee from financed buyers before accepting their offer.
Example
Ken accepted a strong offer on his home in a competitive market, only to have the bank's appraisal come in $15,000 below the agreed-upon purchase price a week before closing. His buyer didn't have extra cash reserves to cover the gap and asked Ken to lower the price instead of walking away from the deal entirely. After some tense negotiation they agreed to split the difference, but the delay and uncertainty were stressful for both sides, and Ken lost nearly two weeks working through the renegotiation with his agent. He later said he wished he'd asked upfront whether the buyer would cover any appraisal shortfall before accepting the offer in the first place. On a second property he sold years later, Ken chose a cash buyer instead specifically to avoid the appraisal process altogether. That sale closed in ten days with no appraisal contingency and no risk of a similar last-minute gap derailing his plans.