22AD… The Low Appraisal Gap

by | Mar 20, 2022 | Real Estate | 0 comments

First things first!  Client Appreciation is Saturday 4/16 from 3pm-6pm for Fantastic Beast 3:  The Secrets of Dumbledore.  Please email me at traciedemars@aol.com with how many adult vs children tickets you need.  Yes, there are 21+ tickets available as well.

Just our way of saying thank you for allowing us to be a part of your home buying/selling adventure, and for your referrals.  We appreciate you!

Happy Spring to you!   The spring real estate market is in full swing and this is an addendum that people are hearing a LOT about…both as buyers and sellers, so let’s discuss it.  Please remember that if you are looking for sugarcoating, you came to the wrong bakery.

As previously discussed the appraisal is paid for by the buyer, but ordered by the lender.  We do NOT know who is coming out, and there is no ‘special list’.  The appraisal order is placed into a system, and a random appraiser, or appraisal company, picks up the order.  We could get Captain America who thinks this home is the greatest thing since Betty White, or we could get Hitler who thinks that this home is not worth the packing peanuts the sellers are using to pack their collection of participation trophies.  We just don’t know, but what is important is that the Lender can only lend the appraisal amount or the offered purchase amount… whichever is LESS.  This is very important when some homes (but not all), are receiving multiple offers over list price.

A buyer can offer whatever they want for a home, but for the lender, it matters if the home can appraise for that offer amount.  In the days of ‘highest & best offers due by Sunday at o’clock pm”, buyers are looking to make their offer stand out to the seller.  One of the ways that a buyer may choose to do this is by offering an appraisal gap.  The appraisal gap addendum (aka 22AD) is, frankly, something that I never dreamed of doing prior to 2020. It was July of 2020, when one of my buyers, after being beat out on 10 homes, that I even remembered that we had this addendum.  My client wrote that offer 17k over list ($316k on a 299k home) with a $4,000 low appraisal gap.  Right now.. that same home has a similar home for sale, on the same street, for $399k.
So what does the 22AD do?  It guarantees the seller that if the appraisal comes in LESS than what the buyer offered to pay, that the buyer will cover that gap by XX amount.  Remember that the Lender can only lend on the appraisal amount, or the purchase offer amount… whichever is LESS.

For example…

Home is for sale for $450,000
Buyer offers to purchase it for $475,000, but home appraises for  $460,000.  When the home appraises for less than what has been legally agreed upon in a signed around purchase/sale agreement, the buyers Realtor sends over to the sellers Realtor a “Low Appraisal Addendum”, that reads, “Home has appraised for LESS than what was agreed upon in the purchase/sale agreement.  Is the seller willing to accept the appraisal amount of XX amount, and continue to closing”
The sellers can accept, or they can choose not to.  If they choose not to accept the lower appraisal amount, the deal dies.  Earnest money is returned to the buyer, and seller can put the home back on the market.  Now… in the effort to keep this shorter, please remember that there are other options that involve buyer agreeing to bring in X amount over the appraisal & seller agreeing to the lower appraiser price. There are also other conditions and terms for the seller going back on the market if buyer & seller can’t come to terms on price and the deal dies.  I am happy to answer questions.

So, what happens with a 22AD low appraisal addendum?  Let’s go back to that example above…

Home is for sale for $450,000
Buyer offers to purchase the home for $475,000, with a $10,000 low appraisal addendum.
Home appraises for $460,000.  Buyers lender will only loan the $460,000, so that is what the buyers loan is for.  However, the buyer has the low appraisal addendum, so the buyers would bring in an additional $10,000 to the closing table and the sellers actually close for $470,000.  So what if the home appraised for $475,000?  Then the buyers loan is for $475,000 and the 22AD means nothing.  Another example is if the home appraises at $470,000… then the buyer would bring in an extra $5,000 (not $10,000) and the seller sells for $475,000.  The purchase price does not go over $475,000 (the purchase price offered by the buyer), and if the home appraises for lower than the offered purchase then, and only then, does the 22AD low appraisal gap come into play, and never for more than what was offered on the addendum.

So, does every home get multiple offers?  No
Does every home receive offers with a low appraisal gap addendum (aka 22AD)?  Again…No.

If a home is going to receive multiple offers, it will most likely happen the first week on the market.  If a home is going to receive multiple offers with the possibility of a 22AD, then it will be the first week on the market.

I know it feels like every home has multiple offers, but they really don’t.  I know everyone hears about people who received 22AD low appraisal gaps with their offers, but again… NOT EVERY HOME DOES.  A home can get multiple offers, and none of them have 22AD low appraisal gap addendum with those offers.

When a home has multiple offers, the sellers & the sellers Realtor compare the pros & cons of each offer.  Sometimes the strongest offer is not necessarily the highest.  There is a lot that goes into making an offer, and good buyers need to think like a seller to get an offer accepted.
I have clients who are getting offers accepted at list price, and with no 22AD.  What is the catch to this magic?  Wait for a home to be on the market for more than a week.

If you are selling your home, sit down with your Realtor and go over what you are looking for & need in an offer.  Do you need rentback?  For how long?  Are you looking for an as-is transaction?  What about comparable homes that have sold in your area/school district in the last couple of months?  What were they listed at vs what did they sell at?

If you are buying a home, and do not have extra funds for a 22AD, do not be discouraged!  You can still get a home without a 22AD, but be prepared.  How else can we strengthen your offer and make it stand out?  This is where you and your Realtor sit down and talk about the homes you are looking at, and what your offer might look like.

Whether you are buying or selling, have realistic expectations in this market.  Your Realtor is here to help.  Ask questions.  I am always available to help with anything you need.

Have a great day, and I will talk to you soon,
;-D

Tracie DeMars / Realtor

ReMax Equity Group
License# 81289
Vancouver, WA
360-903-3504

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