The incredible boom in Denver real estate
, paced by a series of record average home prices
that only recently have shown signs of moderating
, has been well documented. But one story remains largely untold — the impact of what's known in the trade as the appraisal gap.
The term may be unfamiliar to those who haven't been looking for a new abode, but its impact can be sizable. According to Veronica Collin of Fresco Real Estate
, the appraisal gap is the reason that so many sales fall apart at the last minute.
"We saw one in five houses come back on the market in metro Denver because of the appraisal gap," she says of dashed deals in recent months.
The appraisal gap is the difference between what a buyer is offering to pay for a house and the amount for which it's been appraised. Here's how Collin, who previously served as a registered appraiser, explains it:
"There are set standards as to how appraisals work. You look for homes similar to your subject home within one mile. If you can't find the exact same house — the same style, the same size — you look for ones that are comparable. The idea is to find three to six comparable homes and determine a value. It's not an average of all the homes. You actually pick one of the houses and say, 'This is the most similar. We'll use this one.'"
The problem is, homes in metro Denver have been selling well above list, and because prices have gone up by so much so fast, appraisals on other homes haven't always kept pace, creating an appraisal gap that frequently runs into the thousands of dollars. And as Collin points out, "No matter what level you're buying, whether it's $375,000 or $700,000, buyers have to make up the gap between the appraisal and the contract price in cash at closing."
This scenario "creates some new issues," she notes. Earlier this year, for example, "a house was listed low, at $475,000, but it was bid up to $570,000, which isn't that unusual," she says. "But it was appraised for $551,000, which meant that the buyer would have had to come up with an extra $19,000."
In that case, the buyers were able to cobble together the extra money — but that's not always the case. "The seller's agent has to confirm that the buyer actually has the money, whether it's coming from parents or somewhere else. And when people can't come up with that much extra cash, the sale can fall through," Collin notes.
"There are four to five ways for a buyer to terminate their contract and get their earnest money back, and one of them is the loan objection, which has to do with changes in your rate or your payment," she explains. "And right now, the loan objection is getting misused by people who decide they don't want to bring all that appraisal gap money — which is why we're seeing so many sales fall through."
In such scenarios, she adds, "sellers have to start over — and hopefully in this market, they'll have a backup offer and it isn't all that painful for them."
The end of such tales isn't as happy for buyers who think they've finally landed the home of their dreams, only to be hit by a last-minute cash demand they can't possibly meet. And agents like Collin are frustrated, too; she'd like to see rules put in place to make the appraisal process more consistent and less opaque.
In the meantime, she says, the size of a potential appraisal gap "is just a guessing game."
One with serious consequences for Denver-area buyers and sellers alike.