An appraisal gap occurs when a home appraises for less than the purchase price the buyer and seller agreed to. In the Philadelphia suburbs — particularly in high-demand school district markets like Lower Merion, Wissahickon, and Colonial — this happens regularly when multiple buyers compete for a property and drive the price above what recent comparables can support. Understanding what an appraisal gap means, how lenders respond, and what buyers can do about it is essential knowledge for anyone making offers in a competitive market.
How the appraisal works
After a purchase agreement is signed, the buyer’s lender orders an independent appraisal of the property. A licensed appraiser visits the home, reviews comparable recent sales, and produces a formal opinion of market value. The lender uses this figure to determine how much they will lend.
Lenders will not lend more than the appraised value. If the agreed purchase price is $750,000 and the appraisal comes in at $720,000, the lender will base the loan on $720,000 — not $750,000. The $30,000 difference is the appraisal gap.
What happens when there is an appraisal gap
In a standard transaction with an appraisal contingency, the buyer has several options:
Negotiate the price down. The buyer can ask the seller to reduce the purchase price to the appraised value. In a buyer’s market, this request is often successful. In a competitive seller’s market — where the seller had multiple offers — the seller may decline. They have evidence that the market valued the property at the higher price, even if the appraiser did not.
Cover the gap in cash. The buyer pays the difference between the appraised value and the purchase price out of pocket, in addition to their down payment. In the example above, a buyer putting 20% down on a $750,000 purchase ($150,000 down) would now need $150,000 (the down payment calculated on $750,000) plus $30,000 (the gap) — or restructure the down payment to 20% of the appraised value plus the gap amount, either way needing additional liquidity.
Negotiate a partial split. Buyer and seller agree to split the gap — the seller reduces the price somewhat and the buyer covers the remainder.
Exit under the appraisal contingency. If the buyer included an appraisal contingency in the PA Agreement of Sale and did not agree to cover any gap, they may be able to terminate and receive their deposit back.
Appraisal gap clauses in competitive offers
In strong seller’s markets, buyers competing for properties in top school districts increasingly include appraisal gap clauses in their offers. An appraisal gap clause is a provision in the Agreement of Sale in which the buyer commits in advance to cover the gap between the appraised value and the purchase price, up to a specified amount.
Example: a buyer offers $750,000 on a home with a list price of $725,000 and includes an appraisal gap clause covering up to $30,000 above the appraised value. If the property appraises at $720,000, the buyer pays $720,000 (the loan basis) plus $30,000 (the gap) for a total of $750,000. If the property appraises at $740,000, the buyer pays $740,000 plus $10,000 gap. If the property appraises at $750,000 or above, no gap exists.
An appraisal gap clause is a meaningful competitive advantage in multiple-offer situations. Sellers understand that a buyer who has committed to covering the gap is a lower-risk offer than a buyer who has not, because a low appraisal is less likely to derail the transaction.
Why appraisal gaps happen in the Philadelphia suburbs
Appraisals are backward-looking by design. Appraisers use comparable sales that have already closed — typically within the past 90 to 180 days — to establish value. In a market where prices are rising quickly, recent sales may not fully reflect the current competitive environment for a given property.
School district markets in particular are susceptible to appraisal gaps because the premium buyers pay for a Lower Merion, Wissahickon, or Upper Dublin address sometimes outpaces the comparable pool. When a well-presented property in Narberth or Blue Bell attracts seven offers and sells $40,000 over list, the appraiser working from sales data from four months earlier may not have sufficient recent evidence to support that premium.
This does not mean the price was wrong. It means the appraised value is a snapshot of the past while the market is moving in the present.
What sellers should know about appraisal gaps
A high offer with no appraisal gap coverage carries real risk in a competitive market. If a seller accepts an offer that is $50,000 over list from a buyer who has no cash reserves to cover a gap, and the appraisal comes in at list price, the deal may fall apart — returning the property to market at a moment that damages its positioning.
Sophisticated sellers in the Philadelphia suburbs — and their agents — evaluate the appraisal risk of each offer alongside the price. An offer $20,000 lower with a written appraisal gap clause covering the full spread is often more valuable than the higher offer without it.
Preparing for an appraisal gap before you make an offer
Buyers who are competing in active markets should discuss appraisal gap exposure before making an offer, not after the appraisal comes back. The questions to answer in advance:
- How much cash is available above the down payment to cover a gap?
- What is the maximum gap the buyer can cover without touching reserves needed at closing?
- Does the property’s location and condition support a price near the offer, or is a gap likely?
- Is an appraisal gap clause worth including in the offer to strengthen it?
Karen models these scenarios in writing before any offer is submitted, so buyers are not making these decisions under pressure at the moment of the gap notice.
Working with Karen
Karen Langsfeld is a REALTOR® and Pricing Strategy Advisor (P.S.A.) with Berkshire Hathaway HomeServices Fox & Roach in Blue Bell. She has guided buyers through appraisal gap situations in both competitive spring markets and in the softer windows when they appear. Understanding when to include a gap clause, how to structure it, and when the comparable data suggests a gap is unlikely is part of how she prepares buyers before offers are submitted.
For buyers who want the full picture of what the PA purchase process involves, the steps to buying a home in Montgomery County covers the appraisal step in context. For a breakdown of what cash is needed at closing beyond the down payment, the guide to what it costs to buy a home in Pennsylvania covers every closing cost line item.
Contact Karen at (215) 495-2914 or through the contact page.