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  • Writer's pictureJesse Ledbetter

The latest real estate scam: Appraisal Gap Insurance

For the low price of a few thousand dollars, you can have the privilege of owning a home that isn't worth what you borrowed and may take years for you to be able to sell. In this blog, I tackle the latest in opportunistic lending "products" designed to get you into a loan today, at all cost... to you.

This "product" is ripe for abuse by real estate agents and loan officers, to drive up home values and their profits. If someone is encouraging you to take on a policy, consider the following:

  1. Increased costs: Appraisal gap insurance typically comes with additional costs, either as a one-time premium or as part of the overall closing costs. This adds to the financial burden for the buyer, increasing the overall cost of purchasing the property.

  2. Limited coverage: Appraisal gap insurance often comes with coverage limits, meaning it may not cover the entire difference between the appraised value and the purchase price. Buyers may still need to come up with additional funds to bridge the gap, particularly if the difference is substantial.

  3. Dependence on appraisals: Appraisal gap insurance is contingent on the appraisal value of the property. If the property appraises for significantly lower than expected, the buyer may still face financial challenges, even with the insurance coverage. Additionally, disputes over appraisals can delay the closing process and potentially jeopardize the entire transaction.

  4. Encourages overbidding: Knowing that they have appraisal gap insurance to fall back on, buyers may be more inclined to offer higher prices for properties, even if they are not necessarily worth the amount they are willing to pay. This can contribute to inflated housing prices and may not be financially prudent in the long term.

  5. Potential for abuse: In competitive real estate markets, some sellers and listing agents may exploit the availability of appraisal gap insurance by intentionally setting listing prices above the property's actual value. This can lead to buyers overpaying for properties and may ultimately harm them financially.

  6. Loan Officers have many pricing tools at their disposal: Before you make an offer on a home, they have a general idea what that home may be worth using a variety of tools at their disposal. If they are encouraging you to take on a policy, it is likely because 1) the current market is regularly seeing offer prices well above market value, 2) they know you are about to offer above market value and want to lock in your buisness.

It's crucial for buyers to conduct thorough due diligence and ensure they are not overpaying for a property, regardless of whether they have insurance coverage.

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