It’s economy 101 – when supply is low and demand is high, prices naturally rise. That’s what’s happening in today’s housing market. Home prices are appreciating at near-historic rates, and that’s creating some challenges when it comes to home appraisals.

In recent months, it’s become increasingly common for an appraisal to come in below the contract price on the house.

Why does an appraisal gap happen?

When the appraiser comes in, they look at the prices of homes that have ALREADY SOLD. In simple terms, while homebuyers may be willing to pay more, appraisers are there to assess the market value of the home, the most weight is given to the values of past sales.

What does this mean for you as a seller or buyer?

The best thing you can do is understand appraisal gaps may impact your transaction if you’re buying or selling. If you do encounter an appraisal below your contract price, know that in today’s sellers’ market, the most common approach is for the seller to ask the buyer to make up the difference in price.

Buyers, be prepared to bring extra money to the table if you really want the home. And sellers, note that if you accept an appraisal contingency, this means that the buyer can walk away from the deal if the appraisal comes in below the contract price.