Should you waive the appraisal on your purchase offer?
Waiving Appraisal Contingencies
If you're keeping an eye or ear on the housing market during a competitive market, you’ve likely heard about waiving appraisals. Maybe you saw it on the news, or maybe your Real Estate Agent advised that you are competing against other buyers who might be doing it.
With low inventory and bidding wars, purchase prices tend to increase quickly, often above fair market value, and this creates the possibility of appraised value coming in lower than the purchase price offered by the buyer. Let’s talk about what an appraisal contingency really is, what options you have as a buyer, and how it will impact you if you use one.
What is an appraisal contingency?
An appraisal is a statement of a home’s market value, given by a licensed appraiser. Anyone can order an appraisal, and it can be used for many reasons, but in the case of a real estate transaction, they are most often ordered by the lender when a new buyer is obtaining financing to purchase the home.
The buyer will pay for the appraisal, which will take place during the due diligence period of the transaction – that is after the buyer and seller have agreed to a purchase contract but before the deal closes. The appraisal amount will determine the maximum amount a lender will loan, as this amount is what the lender sees as the market value of the property, regardless of the agreed-upon purchase price.
While rules, laws and standard procedures will vary by region, the appraisal amount can have a big impact on the outcome of the deal. An appraisal that comes in at or above the proposed purchase price simply allows the contract to move forward.
What happens when an appraisal comes in low?
In a contract with a standard appraisal contingency, if an appraisal comes in low, the buyer and seller have some options. Those typically include:
- Lowering the purchase price to the appraisal amount
- Keeping the price at the originally agreed upon one - with the buyer paying for the difference between the purchase price and appraisal amount in extra cash at closing
- Renegotiation at a new purchase price in between the two amounts - with the buyer paying a now smaller difference in cash
- Termination of the contract altogether (usually the least desirable for both parties)
How can buyers make their offer stronger?
As for what you can do to make your next purchase offer even stronger, know your own appraisal contingency options and what makes sense for your situation.
- If you are paying cash, you can skip the appraisal altogether and the contract is not contingent upon one. If you are satisfied with both what you think the house is worth and what you are offering to pay, this gives the most comfort to the seller.
- If you are obtaining financing, odds are you cannot completely do away with an appraisal as the lender nearly always requires one. But, you can guarantee to pay the entire difference between the low appraisal and the purchase price, if you have the means to do so. There is no gap limit suggested in this case, so theoretically the cash owed could be substantial. From the seller’s standpoint, this tactic effectively waives the appraisal contingency.
- A third option is to offer to pay the difference in appraised value and contract price up to a certain maximum. This provides some insurance to the seller, although not as much as a full waiver, and it still requires you as the buyer have the cash available to cover the gap. You may even need to provide proof of funds to the seller as well, as part of your offer package. Just like in a typical purchase contract, the buyer and seller can continue to negotiate in the event the difference is higher than the buyer’s proposed limit, or the parties can terminate the agreement.
Talk to your Agent about appraisal options, and make sure you fully understand your obligations if you choose to use one. It can be a great tool to strengthen your purchase offer, outbid others, and ultimately move into your new home.
