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Closing cash: The appraisal gap war Colorado homebuyers are losing

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Posted at 8:01 AM, May 21, 2021

DENVER — Colorado's real estate market is not just hot — it's on fire.

Bidding wars and appraisal gaps now come standard with an offer. If buyers can't bring potentially tens of thousands of dollars in cash to closing, they often can't compete.

The skyrocketing housing market didn't scare the Fox family at first.

"We're renting. We're looking to buy a house. We have two large dogs and two young kids," said Alissa Fox, who said she and her husband started making offers in February. "As the time went on and we were losing offer after offer, we got more and more aggressive up to the amount that we were looking [to pay] for a house."

Fox said she put in 26 offers and lost all of them.

"I would say at least half of those with a significant appraisal gap," she said. "It was frustrating."

An appraisal gap is the difference between the price offered for a home if it's more than the appraised value, which is usually the amount the bank will loan. The appraisal is based on recent comparable sales, or comps, but in this housing market, Colorado realtor Stacy Neir said comps can't keep up.

"That was the ceiling has now become the floor because prices are escalating so quickly," Neir said. "For example, in the Central Park neighborhood, we've seen 13% appreciation since Jan. 1."

To compete, many buyers have to promise in their offer to cover part of the appraisal gap, or all of it, in cash, often before they know how much that gap will be.

Neir recently sold a home for $120,000 over asking price, and the buyers had agreed to pay a significant appraisal gap.

"They also agreed to pay for up to $100,000 appraisal gap," Neir said. "So unfortunately, the house did not appraise. So the buyers did have to bring an extra $70,000 to closing. That stung."

That's $70,000 on top of a down payment and closing costs.

Bryant Vayhinger, president of the Colorado Association of Real Estate Appraisers, is not exactly popular these days.

"We're providing a service, but our service is to the banks. That's a misconception a lot of times is buyers think that we're providing a service for them. But it's to protect that loan on the bank side," said Vayhinger, who said appraisal gaps are a sign of a strong market.

Appraisers are seeing gaps across the board averaging 5 to 10%, frustrating buyers, sellers and realtors.

"But on the backside, it has to be supported," Vayhinger said. "We can't just have unchecked growth or else it's going to spiral out of control, and we're gonna have the crash all over again."

Realtors, however, generally feel market value is what buyers, and sometimes several buyers, will pay.

Because of historically low interest rates, realtors don't recommend waiting for the market to cool down and say Colorado's market shows no sign of slowing down anyway.

Neir said one insider secret is to get an appraisal as late as possible in the deal so the market may have a chance to catch up and find creative ways to attract sellers.

"We are offering to pay for the seller's move. I mean, you really have to think out of the box right now in order to get an offer accepted," Neir said.

But some buyers, including the Fox family, are tired of the fight.

Their realtor, Amanda Larson with Coldwell Banker, summed up the issue nicely: "My job is to protect my buyers, and them coughing up all this cash that ultimately is just thrown to getting the home — it doesn't go towards their down payment, it doesn't help them in any way, except to get a home — it's very scary for them."

The Foxes tapped into a 401K, got money from family, sold a house in Texas they had planned to keep, and it still wasn't enough to win a house.

Instead of surrendering, though, they changed course, looking further outside of the Denver metro in Johnstown. They bought a new build that won't be ready until September.

"We're happy that it's finally over for us," Fox said. "You're like, 'Oh! Somebody wants our money! Please take it from us.'"

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