Financing is often necessary when buying commercial property, such as land for a winery. Especially when bidding on vacant parcels or agricultural land, buyers may overestimate the current fair market value of the property, possibly due to fear of competition.
If they offer a high price unsupported by the current market and the condition of the property, that could potentially complicate their ability to complete the transaction. Lenders typically require appraisals before closing, and if an appraisal gap arises, a sales transaction could fall apart.
What causes an appraisal gap?
An appraisal gap is essentially the difference between the appraised value of a property and the amount offered by a buyer. Lenders generally want to ensure that the amount of financing they extend is recoverable in the event of a buyer’s default.
If the buyer does not have the capital to make up the difference between the appraised value and the offer they made, then they may need to cancel the closing. Various factors, including a thorough assessment of the land itself or the condition of outbuildings, could influence what an appraiser determines the property is actually worth.
Some buyers might attempt to secure financing with another lender, which could lead to a new appraisal. Even then, however, there is still a risk of the appraisal coming in too low.
Working with real estate professionals to integrate appropriate contingencies into commercial real estate offers can help buyers protect themselves from the risk of financial losses and legal controversies following low appraisals. An attorney’s insight can help people avoid appraisal gaps to begin with, and handle them effectively if they interfere with a transaction.