After Repair Value (ARV): The Foundation of Every Deal
ARV is the single most important number in a fix-and-flip deal. Master the art and science of estimating it accurately.
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Property Valuation5 min read
Appraisal Gap Coverage: Protecting Your Deal from Low Appraisals
In competitive markets, appraisal gap clauses can make or break a deal. Here's how they work.
An appraisal gap is the difference between a property's contracted purchase price and its appraised value. When the appraisal comes in below the purchase price, the buyer's lender will only finance based on the lower appraised value, leaving the buyer to cover the gap with additional cash or walk away.
Appraisal gap coverage clauses explicitly define how this situation will be handled. The most common structure: the buyer agrees to bring up to a specified amount (e.g., $25,000) of additional cash to close if the appraisal comes in below the purchase price. Beyond that cap, the buyer has the right to renegotiate or terminate.
For sellers in competitive markets, requiring appraisal gap coverage reduces risk. A buyer promising to cover up to $25,000 in a low appraisal shows commitment and reduces the likelihood of the deal falling through or requiring a price reduction.
For buyers, appraisal gap coverage is a tool for winning bids in competitive situations. Offering $10,000–$50,000 in gap coverage can make an otherwise mediocre offer competitive. But it creates real risk: if the appraisal comes in $30,000 low on an offer with $10,000 gap coverage, you're either renegotiating, walking away (potentially losing earnest money), or accepting the risk of over-paying.
For flippers as sellers, demanding appraisal gap coverage from retail buyers can accelerate closings and protect profits. For flippers as buyers in competitive markets, offering limited gap coverage ($5,000–$15,000) can help you win deals without creating unacceptable risk. Always tie gap coverage to your ARV confidence, if you're highly confident in the ARV, you can offer more aggressive coverage; if you're less certain, keep coverage minimal.
The clause language matters enormously. Specify the maximum coverage amount, what happens if the gap exceeds coverage (renegotiate, terminate, proceed at appraised value), and the timeline for decisions. Vague language causes disputes; precise language prevents them.
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