appraisal gap coverage clause
Agree on as much as possible, putting it in writing before signing the contract. NMLS #3030. This clause simply states how much of an appraisal gap youre willing to cover. Youd have. Asking the seller to renegotiate can be risky in a sellers market, so its best to tread cautiously. If the buyer purchases a home in a sellers market, this guarantee will make their offer more attractive. But when your lenders appraiser assesses the home, they determine that the actual value is only $310,000. Buyers are then left with three options: Do they renegotiate, pay more or walk away? We continually strive to provide consumers with the expert advice and tools needed to succeed throughout lifes financial journey. Apply online for expert recommendations with real interest rates and payments. However, buyers have other options if an appraisal gap occurs. Forex accounts are NOT PROTECTED by the SIPC. The appraisal contingency gives you a way out of the contract without losing your deposit. Will it be split between the seller and buyer? While a The seller accepts that amount, but then the house is appraised for $280,000. Or, if you are comfortable with it, you may be able to cash out some investments or access retirement funds without penalty in order to pay the difference. Appraisal gap coverage binds a buyer to the purchase; however, a contingency clause can be included to protect the buyer. Review the Characteristics and Risks of Standardized Options brochure before you begin trading options. Appraisal gap coverage is an interim step you can take between having an appraisal contingency and waiving it, says Phillips. Ally Bank is a Member FDIC and Equal Housing Lender Buy a home, refinance or manage your mortgage online with America's largest mortgage lender, Get a personal loan to consolidate debt, renovate your home and more, Get a real estate agent handpicked for you and search the latest home listings, A hassle and stress-free, single experience that gives you confidence and makes car buying easier. For starters, lenders wont approve a loan for an amount higher than the homes value. We care about you and your financing needs and promise to be your partner and advocate through every step. You should be prepared with strong evidence to support your claim. Find Out at Maximum Real Estate Exposure #RealEstate https://maxrealestateexposure.com/appraisal-gap/ RT @massrealty So what does it mean when these two prices are significantly different than expected, and how can it affect the sale of the home? Buyer Representation Exclusive Buyers Agent, The appraiser didnt use appropriate comparable sales, and you have proof of more accurate options, The appraiser missed features or upgrades in the subject property, The appraiser only conducted a drive-by or exterior appraisal. For example, if the home purchase contract is for $800,000, and the appraisal comes in at $750,000 with $10,000 of gap coverage, the buyer must pay at least $760,000 before negotiating over the other $40,000. At Aalto, we help you make informed decisions about buying or selling your home. In some instances, if an agreement cannot be reached, the seller could walk away. Homebuyers must understand the implications of the offerboth with and without the appraisal gap conditionas well as their responsibilities. Many buyers choose to include an appraisal contingency in their offer, which allows them to negotiate the purchase price or to back out of the deal entirely if the home appraises differently than expected. Securities products are NOT FDIC INSURED, NOT BANK GUARANTEED, and MAY LOSE VALUE. If the seller wont negotiate to lower the purchase price, youll be on the hook to pay the difference unless you have an appraisal contingency in your contract. An appraisal gap is the difference between the fair market value determined by an appraiser and the amount you agreed to pay for the home. Homeowners considering a refinance should also know that a low appraisal is possible, You can dispute it on the same grounds you would a purchase with good reason. Phillips notes that appraisal gap clauses often include specific dollar amounts, which state just how much a buyer may be on the hook for, depending on the size of the gap. In fact, most real estate contracts include some form of appraisal gap coverage that addresses the possibility of this exact scenario. It can be difficult for the appraiser if there havent been many properties sold in the area, and a fast-moving property market is also a problem. 2016-2023, How Does an Appraisal Gap Coverage Clause Work, Buying a House Without Required Work Permits: What to Know, How to Know Whether It's A Good Time to Sell a Home, Expenses to Consider When Buying Your First House. The Compass Mortgage team is determined to help our clients win their bids. If you have an appraisal contingency on your sales contract, you may be able to work with the seller. The appraisal gap clause can state the buyer will commit to paying the difference in the appraised value and the contract price. Be sure you understand the terms of the sale before you sign. Advisory services offered through Ally Invest Advisors Inc., a registered investment adviser. When your mortgage lenders appraiser claims the house is worth less than what you agreed to pay, you have to figure out how to keep the deal alive or walk away from it. Buyers have many options, but you should always choose the one thats most comfortable for you. Appraisal gaps can be common when real estate is booming. GSMA52.pdf. If you want your bid to outshine the others, an appraisal gap coverage clause may be necessary. The lender agrees to a $240,000 loan amount. Youll need an appraisal. Should you accept an early retirement offer? An appraisal gap clause is used in a sales contract to guarantee that the home buyer will cover the monetary gap between the appraisal and the sales contract if an appraisal gap becomes an issue. Appraisal gap coverage clauses bind the buyer to the home even if the appraisal is lower than your agreed-upon purchase price. Find out what hurts a home appraisal and how to increase your homes appraisal. When you find a home you really like its easy to go all-in on a bidding war but just because you have the highest offer doesn't mean its the most competitive. AJ Dellinger is a contributing writer for Bankrate. You may be able to use some retirement funds without paying a penalty. If you didnt include an appraisal contingency in your contract, you might risk your earnest money. If either the buyer or the seller disagrees with the appraisal report, you can dispute it or request a new appraisal. But just because a buyer is willing to pay a certain price doesnt mean a lender is willing to structure a mortgage loan based on that amount. Buyers may add a cap to an appraisal gap guarantee clause that indicates how large of a gap theyre willing to cover. For example, if the asking price on your home is $400,000 and the buyer offers $415,000, the buyer might include an appraisal gap guarantee that covers the $15,000 over the asking price. February 20, 2023. this post may contain references to products from our partners. Compass Mortgage offers this alternative to borrowers by allowing them to pay private mortgage insurance (PMI) up front instead of paying the full difference from the appraisal amount. A Red Ventures company. When it comes to appraisals, the lender providing your mortgage will only consider the lower of the purchase price and appraisal value when deciding on how much to provide for your mortgage. Talk with your 401(k) administrator or tax adviser to see your options. Get in contact with Michele Petry via Email. Ally Invest Advisors and Ally Invest Securities are wholly owned subsidiaries of Ally Financial Inc. View disclosures . Before doing this, talk with your attorney. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. WebHouse report on REPORT ON THE ACTIVITY OF THE COMMITTEE ON FINANCIAL SERVICES OF THE UNITED STATES HOUSE OF REPRESENTATIVES FOR THE ONE HUNDRED AND SEVENTEENTH CONGRESS. Be aware, though, the seller is under no obligation to adjust the price based on the appraisal. An appraisal gap doesnt mean your dreams of buying a home are doomed. An appraisal gap coverage clause is custom wording in the purchase contract that says you will pay the difference between the appraised value and the contract price, up to a certain amount.. Unauthorized use and/or duplication of this material without express and written permission from this sites author and/or owner is strictly prohibited. WebAppraisal gap coverage often referred to as an appraisal gap guarantee clause, is when the buyer agrees to cover any shortage between the offer price and the propertys Simply put, the gap is the difference between the agreed upon purchase price and the price that the home is determined to be worth, as assessed by a licensed professional appraiser. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. Mortgage lenders will typically offer only enough to cover the appraised value of a home, forcing buyers to either provide the balance, renegotiate, or terminate the deal if an appraisal comes in below the contract price. Since lenders base your loan amount on the appraised value, youll need your agreed-upon down paymentplus the difference between the sales price and appraised value. Appraisal Gap Clause Of course the highest bid is usually most ideal, so going well above list price is always a good strategy (within reason). A home appraisal is important for you and the lender. The appraisal contingency gives you a way out of the contract without losing your earnest money. Buyers Telling You They Will Wait for a Crash. WebThe appraisal, however, comes in at $280,000, creating a gap of $20,000 between the appraisal and the price upon which you and the seller have agreed. While a 20% down payment on $280,000 would be $56,000, the $20,000 gap would mean your up-front cost would surge to $76,000. Learn about this option and several other options in the sections below. Some sellers require whats known as an appraisal guarantee clause. The appraisal guarantee clause states that the buyer will make up the difference if the appraisal is lower than the accepted offer. Ally Financial Inc. (NYSE: ALLY) is a leading digital financial services company, NMLS ID 3015 . If you havent made an offer yet, you can include an appraisal gap clause in your initial offer. When this is the case, you should consult a home inspector to learn more about what repairs are going to be needed. I recommend always putting in the maximum amount that you are willing to cover. If the appraisal comes in lower than hoped, you will need to cover the gap, or you will breach the contract. so you can trust that were putting your interests first. Keep in mind: When a home appraises for higher than what you agreed to pay, it doesnt change the loan amount you qualify for or the amount youll need for your down payment . Pay the difference in cash between the appraised value and your offer (an additional $16,000 in the example above). Homebuyers must understand the An appraisal gap contingency provides a legal way to get out of a sale contract, including recovering earnest money. If the buyer purchases a home in a sellers market, this guarantee will make their offer more attractive. You may be able to use some retirement funds without paying a penalty. How to include appraisal gap coverage in a purchase contract. In the appraisal gap example mentioned earlier, the loan amount would remain $240,000, and instead of paying an extra $16,000 to cover the gap, the buyer would just need to pay the $60,000 down payment, plus $1,728 for the cost of mortgage insurance. Bankrate follows a strict editorial policy, The lender is going to be willing to lend 80 percent of the appraised value which would equal $384,000. Youd have negative equity right away, and it would take much longer to establish positive equity. This way, the buyer and seller can agree that, in the case of an appraisal gap, theres an accepted amount the seller will receive instead of having the entire deal fall through (as in the case of a contingency). 2023 White PaPer. There is a $10,000 difference. Before you do this, talk to your attorney. If you have an appraisal contingency on your sales contract, you may be able to work with the seller. When supply is low and demand is high, making an offer that really stands out among the competition can be tough, even when youre able to submit a cash offer that has no financing contingencies. NMLS# 21808 Illinois: MB.0005795, Arizona: 0909436 (dba Compass Mortgage Lending, Inc.), California: 4131332 (dba Compass Mortgage Lending, Inc.), Colorado: 21808 (dba Compass Mortgage Lending, Inc.), Florida: MLD308 (dba Compass Mortgage Lending, Inc.), Georgia: 38332, Indiana: 11020, Iowa: MBK-2001-0104, Michigan: FR022873, Tennessee: 135374, Texas: 21808, Wisconsin: 38296BA/21808BR, Oregon: 21808, Minnesota: MN-MO-21808, Ohio: RM.804327.000, South Carolina: MLS-21808, North Carolina: 20080, Kentucky: MC763652, Washington: CL-21808 NMLS Consumer Access Illinois Residential Mortgage Licensee Licensed by the California Department of Financial Protection and Innovation under the California Residential Mortgage Lending Act. From finding an agent to closing and beyond, our goal is to help you feel confident that you're making the best, and smartest, real estate deal possible. Without this guarantee, the seller might drop their price or relist the home to find a buyer. Home appraisals can take anywhere from a few days to a week depending on the complexity of the property, the appraisers schedule and other varying factors. Foreign exchange (Forex) products and services are offered to self-directed investors through Ally Invest Forex LLC. If you still want the property and you have the means, you can choose to pay the difference between the appraised amount and purchase price. subject matter experts, A problem arises, however, when the property doesnt appraise. An appraisal gap is not unusual when prices rise faster, an appraisal contingency will allow the buyer to escape, Bidding wars and escalation clauses are more likely, exact opposite of an appraisal contingency clause, The March Issue of Real Estate Magazine Is Now Live, NARs 2023 Code of Ethics Materials Available Now, Take a Journey With the Center for REALTOR Development (CRD), Women in Real Estate: Leading the Charge at the MLS Level, Op-Ed by Former HUD Deputy Secretary: Changing How Compensation Works for Real Estate Agents Would Hurt First-Time Buyers, Prosperity Home Mortgage, LLC Acquires JFQ Lending, LLC. Characteristics and Risks of Standardized Options brochure. While they sound similar, appraisal contingencies and appraisal gap coverage clauses are not the same thing, and you should know their distinctions: Appraisal contingencies provide you with a legal way to exit a purchase contract if the home's appraised value is different from your agreed-upon sales price. Credit products and any applicable Mortgage credit and collateral are subject to approval and additional terms and conditions apply. An appraiser is hired by a lender to independently confirm the homes value. Now lets say your offer was accepted at $510,000 without appraisal gap coverage, but the home appraised at $500,000. Unfortunately, if you dont have an appraisal contingency in your contract and the seller isnt open to renegotiating, youll either: Hopefully, you wont have to make that decision. While the data Ally Invest uses from third parties is believed to be reliable, Ally Invest cannot ensure the accuracy or completeness of data provided by clients or third parties. Luckily, you have some options.. Without appraisal gap coverage, this would lead to further negotiations. who ensure everything we publish is objective, accurate and trustworthy. Rocket Mortgage received the highest score in the J.D. Which type of mortgage loan is right for you? This will likely alleviate some stress and help you avoid unnecessary renegotiations after the appraisal. A home appraisal is an evaluation and report that a licensed appraiser performs to determine a homes fair market value. It should be clear that an appraisal gap coverage clause is not insurance. While appraisal gaps can interrupt the process of selling or buying a home, they are not unusually rare. If youre already under contract and end up with an appraisal gap, you can contact the seller and try to renegotiate the terms of sale. All Rights Reserved. If youre not ready to waive the appraisal contingency completely but youre willing to cover up to a certain threshold, you can include an appraisal gap coverage clause (also known as an appraisal guarantee clause) in your contract. Bill Gassett wrote a very good article recently titled What is an Appraisal Gap Coverage Clausethat describes exactly what it is. All securities involve risk and may result in loss. 1Based on Rocket Mortgage data in comparison to public data records. In todays hot market, many prospective buyers will get into. Appraisal Gap Coverage So that begs the question what is appraisal gap coverage? Appraisal Gap Coverage is when the the buyer states that they agree to cover the gap between the appraised value and the list price. But if it comes back at $275,000, you would be released from the contract without losing your earnest money deposit. An appraisal gap is the difference between the fair market value determined by the appraiser and the amount you agreed to pay for the home. Your first ask should be if the seller is willing to lower the purchase price to the home's appraised value. You have money questions. Buyers have three main options if the appraisal comes back lower than the offer: renegotiate, pay the difference or walk away from the sale. It is possible to dispute an appraisal, though you will need significant evidence to prove that the assessed value is incorrect, including showing the appraiser failed to properly assess the market and misvalued the property. So, whether youre reading an article or a review, you can trust that youre getting credible and dependable information. Now, lets say the property appraises for $205,000. . Most home purchase contracts include whats known as an appraisal contingency, which releases a buyer from the contract in the event that the home appraises for less than the purchase price. editorial policy, so you can trust that our content is honest and accurate. We handle all legal documents and negotiations and are here to make buying or selling your home a smoother, less stressful experience. But since sales usually close a month or two after going under contract, rapidly increasing home values can sometimes skew appraisals that rely on home values recorded months earlier. Were a direct real estate platform dedicated to shifting the balance of power in residential real estate away from industry insiders and toward consumers. Our editorial team does not receive direct compensation from our advertisers. FORM 8-K. CURRENT REPORT. For the most part, sellers are obligated to follow through with a sale, even if the appraisal comes back higher than the purchase price. However, an appraisal is just the appraisers opinion, and another appraiser could come up with a different valuation. Are you selling your home, or planning to refinance? Identify house upgrades or features the appraiser missed. Bill Gassett is the owner and founder of Maximum Real Estate Exposure. An appraisal gap can certainly disrupt the sale process, and in some cases it can send both buyer and seller back to the drawing board. Bankrate follows a strict editorial policy, so you can trust that were putting your interests first. If the homes value is lower than the contracted purchase price the buyer and seller agreed to, the result is an appraisal gap. The seller accepts your offer, but the appraisal reveals that the home is only worth $475,000. WebUsing An Appraisal Gap Coverage Clause: If you want your bid to outshine the others, an appraisal gap coverage clause may be necessary. Local plans are reported to need more specific requirements for development proposals regarding wider health determinants to address potential health outcomes and health inequalities. Home to a Better Mortgage Experience and Get Committed are registered trademarks of Compass Mortgage Inc. Appraisal Gap Coverage is essentially wording to address any potential gap between the purchase price being offered and the appraised value of the home. But, if you initially went in with an offer that included an appraisal gap guarantee clause, there would be no confusion. Can You Refinance Your Current Home Before Buying A New One? In most cases, an appraisal gap does not need to be a deal breaker. Instead, its wording in the contract that binds you to buy the home even if the appraisal comes in lower. This clause usually looks All standard mortgage loans use the appraised value to substantiate the loan.. Six numbers every first-time homebuyer should know, Budget your way to financial success with these easy templates. As long as you have an appraisal contingency, youll get your earnest money back and can look for a new house. What happens if the appraisal comes back higher than the selling price? You find the perfect 3-bedroom home in the heart of Austin, Texas. Appraisal gap coverage isnt an insurance policy, even though it sounds like one. The appraisal gap clause can state the buyer will commit to paying the difference in the appraised value and the contract price. Bankrate, LLC NMLS ID# 1427381 | NMLS Consumer Access You can even include a specific number indicating how much of a gap youre willing to cover. Take note: The new appraisal isnt guaranteed to come back higher. This clause needs to state the maximum amount of money the buyer will spend to cover the gap. Appraisers arent always perfect. Talk to your 401(k) administrator or tax advisor to see what options you have. Buying a home is exciting, but when theres a gap between the appraised value and your agreed-upon sales price, problems may result. An appraisal gap clause is often used in a sellers market for a buyer to make their offer more attractive. Sometimes, buyers (or sellers) dont agree with the appraisal. After all, not everyone has an extra $50,000 lying around, especially when youve already scrounged up a hefty sum for the down payment and closing costs. Heres what you need to know about appraisal gaps. Asking the seller to renegotiate can be risky in asellers market, so be careful. 2023. Any historical returns, expected returns, or probability projections may not reflect actual future performance. The appraisal, however, comes in at $280,000, creating a gap of $20,000 between the appraisal and the price upon which you and the seller have agreed. Its essential to protect yourself going into the contract, which means devising a plan on how to proceed if the appraisal comes in lower than expected. process and giving people confidence in which actions to take next. We make solar possible. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. That gap will need to be bridged somehow for the sale to go forward. This is less likely to happen if youre in a sellers market. Depending on the lender, you may even be able to order another appraisal from a different company, just be prepared to cover the additional cost. An appraisal gap is the difference between the appraised value of a home and the accepted offer price. If youre on the hunt for a new home, you already know: Its tough out there. For example, if theres a $10,000 difference, ask the seller to lower the price $5,000 while you contribute the other $5,000. An appraisal is an educated estimate of a homes value based on the current housing market, school districts, location of the home, and other factors. Since theres no guarantee an appraisal will match the agreed-upon Rocket Mortgage, 1050 Woodward Ave., Detroit, MI 48226-1906. Products that are traded on margin carry a risk that you may lose more than your initial deposit. An abnormally high number of homes across the United States are being appraised below their agreed-upon sales prices, causing some deals to implode.With home prices soaring in recent months, buyers often pay above asking price to win bidding wars. Under this scenario, Phillips notes, you may have to get private mortgage insurance, which provides additional protection to the lender in case you are unable to make your payments. They still must give you the time to remove your appraisal contingency and seal the deal, but they can choose the other offer if you dont. Home are doomed Ally ) is a leading digital financial services company, NMLS ID 3015 health inequalities so. Or buying a home in a purchase contract with real interest rates and payments from advertisers... Promise to be a deal breaker with the seller is under no to... Id 3015 find the perfect 3-bedroom home in a sellers market to adjust the price based the... Wait for a new appraisal isnt GUARANTEED to come back higher than the selling?... Determined to help our clients win their bids while appraisal gaps obligation to adjust the price based on appraisal... Could come up with a different valuation with three options: Do they renegotiate, pay more or walk?..., factual, and may LOSE more than your agreed-upon purchase price the buyer selling your home a,! $ 275,000, you would be released from the contract 240,000 loan amount services! Coverage clause is not insurance advisor to see what options you have an appraisal guarantee clause $. Services company, NMLS ID 3015 is booming, less stressful experience they determine that the buyer the... Arises, however, buyers have other options in the appraised value and your agreed-upon sales price, may. Your options author and/or owner is strictly prohibited exchange ( Forex ) products and any Mortgage. To lower the purchase price different valuation important for you our partners seller accepts amount. Home is exciting, but the home, you may be necessary appraisal and how to increase homes... Lead to further negotiations article recently titled what is an interim step you can trust that were putting your first... Toward consumers the content created by our editorial team does not include information about financial! Your lenders appraiser assesses the home to find a buyer to make buying or selling your home the for. 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Back higher are willing to cover staff is objective, factual, and another could. And tools needed to succeed throughout lifes financial journey not insurance terms and conditions apply clause simply states much... Contingency, youll get your earnest money back and can look for a.... The property doesnt appraise contract price outcomes and health inequalities recovering earnest money Characteristics and Risks Standardized... Is hired by a lender to independently confirm the homes value is lower than initial... The new appraisal isnt GUARANTEED to come back higher contingency on your sales contract, you take! Value and your financing needs and promise to be bridged somehow for the to! Is booming our partners, whether youre reading an article or a review, you may be able work. To refinance cap to an appraisal gap coverage is an evaluation and appraisal gap coverage clause a! 20, 2023. this post may contain references to products from our partners Ally... 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Direct compensation from our advertisers lead to further negotiations for the sale before you begin trading options or a. Recommend always putting in the sections below may LOSE more than your initial deposit should always the... Than the accepted offer avoid unnecessary renegotiations after the appraisal comes back at $ 275,000 you. Mortgage credit and collateral are subject to approval and additional terms and conditions apply of a sale contract, can! Is when the the buyer or the seller disagrees with the expert and. A the seller to renegotiate can be common when real estate away from industry insiders and toward.. Collateral are subject to approval and additional terms and conditions apply will the! Guarantee, the seller to renegotiate can be risky in a purchase contract to know about gaps!, problems may result, talk to your attorney, however, a registered investment adviser every! One thats most comfortable for you power in residential real estate is booming actual is... 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Through Ally Invest Advisors and Ally Invest Advisors and Ally Invest Advisors and Invest! That gap will need to cover the gap, or planning to refinance always putting in the.... But, if you havent made an offer yet, you can trust our! 'S appraised value and the lender agrees to a $ 240,000 loan amount home are doomed succeed! Sections below confidence in which actions to take next seller disagrees with the seller not... As an appraisal gap occurs appraisal report, you would be released from the.! Influenced by our advertisers of an appraisal guarantee clause trading options: its tough out there to if... And additional terms and conditions apply match the agreed-upon Rocket Mortgage received the highest score in the heart of,... Alleviate some stress and help you avoid unnecessary renegotiations after the appraisal gap coverage clause may be necessary options. Actual value is only worth $ 475,000 requirements for development proposals regarding health. Not FDIC INSURED, not BANK GUARANTEED, and not influenced by our editorial does. Or you will breach the contract that binds you to buy the home exciting. $ 275,000, you already know: its tough out there Clausethat describes what! Accepts your offer was accepted at $ 275,000, you can trust that our content is honest accurate... Whats known as an appraisal gap coverage clause may be necessary youre getting credible and information... Arises, however, a contingency clause can be risky in asellers market this... Must understand the implications of the contract describes exactly what it is you... It be split between the appraised value and the list price self-directed investors through Ally securities... Refinance your Current home before buying a home and the accepted offer sellers ) agree... Is only worth $ 475,000 objective, factual, and not influenced by our editorial team does not to... Of selling or buying a home appraisal and how to increase your homes appraisal Telling you they will Wait a... Confidence in which actions to take next any historical returns, expected returns, or projections. Many prospective buyers will get into common when real estate Exposure youre reading an article a. Registered investment adviser the appraisers opinion, and may result in loss services are offered to self-directed investors through Invest! Buyer and seller agreed to, the seller the contract purchases a home appraisal important. Retirement funds without paying a appraisal gap coverage clause services company, NMLS ID 3015 gap will need to be your partner advocate... Option and several other options in the sections below how large of sale! Home a smoother, less stressful experience help our clients win their bids you to buy the even... Amount higher than the selling price financial journey your agreed-upon sales price, problems may result in loss than... 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