22AD, the Low Appraisal Gap Addendum

Happy Spring to you! The spring real estate market is in full swing and this is an addendum that buyers and sellers are hearing a lot about, so let’s discuss it. As previously discussed the appraisal is paid for by the buyer, but ordered by the lender. The appraisal order is placed into a system, and a random appraiser, or appraisal company, picks up the order. 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. 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 which guarantees the seller that if the appraisal comes in LESS than what the buyer offered to pay, that the buyer will cover that gap. When the home appraises for less than what has been legally agreed upon in a signed around purchase/sale agreement, the buyer’s Realtor sends the seller’s 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.

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 and the seller’s Realtor compare the pros and 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.

If you are selling your home, sit down with your Realtor and go over what you need in an offer. Do you need rent back? 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!