The appraisal is an important part of the home buying process because it shows the buyer and their lender how much the home is actually worth. But as home prices continue to rise, the gap between home values and their appraised values grows. What does this mean for buyers and sellers?

Home values have risen across the country as a result of the COVID-19-induced real estate boom as demand heavily outpaces supply. This is happening especially in the Boise area, as Ada County median home sale prices have surpassed $500,000. In May 2020, Ada County median home sale prices were around $360,000. Nationwide, 54% of homes are getting offers over the listing price, according to the National Association of Realtors (NAR). In Boise, you will be hard-pressed to find a home that doesn’t get multiple offers over the listing price.

Pre-2020, an appraisal gap was the rare exception to the rule. Today, it is becoming surprisingly common as home values skyrocket. According to data from the CoreLogic and the NAR, appraisal issues delayed 18% of contracts and terminated 6% of contracts nationwide. In May 2021, appraisal issues caused delays in 26% of contracts and resulted in terminating 13% of contracts nationwide. So what does this mean for Boise real estate buyers and sellers? We’ll break it down below.

What does this mean for buyers?

Like we mentioned above, the buyer’s lender uses the appraisal to ensure they aren’t cutting a check for more than the home is actually worth. If the house is too over-valued, they risk creating an underwater loan for the buyer, which also hurts the lender. To combat this, many buyers are offering appraisal gap coverage in their contracts—usually up to a given dollar amount. This way, if the appraisal comes in low, the buyers will need to cover the difference to allow the sale to proceed. If the buyer does not have appraisal gap coverage, there will be a delay as they secure more cash to cover the gap. Or, the buyer will have to back out of the contract, which could cost them their earnest money if they put some forward.

What does this mean for sellers?

The seller has a very vested interest in making sure the deal closes and they sell their home. Pre-COVID-19, the seller may have allowed some room for negotiation if there weren’t other offers waiting. With fewer interested parties, sellers may have been somewhat open to making a  deal. During the current heavy seller’s market, a buyer trying to cut a deal will be moved aside for another buyer that has the funds. As such, sellers will be looking for buyers who can cover the appraisal gap.