Should You Waive The Appraisal?

The majority of people buying a house get a loan to help them with their purchase.  Lenders want proper collateral for those loans they make sure that their buyers aren’t buying a house for too high of an amount.  Lenders loan on the lower amount of the purchase price or the appraisal price.

Appraisers jobs are difficult in the rising market we are in.  They are in a spot where they are being asked to justify a sale that is happening right now with data from the past few months.   And buyers who want to win a house are outbidding others and often going above what an appraiser can make a case for.  

Many of these buyers are leaving appraisal contingencies out of their offers.  Appraisal contingencies allow buyers to renegotiate the price as low as the appraisal price.  By leaving out this contingency, buyers are not leaving themselves the option to renegotiate the price if the appraisal is low.  And why are they doing this?  Because in this competitive market sellers love to see offers without this contingency so that they know the price won’t be lowered.

Without the appraisal contingency, buyers are committing to make up any difference between the sales price and appraisal in cash.  For example, if a buyer wins a contract on a house for $650,000 and is getting a loan with a 20% down payment, the buyer expects their down payment to be $130,000.  But if the appraisal comes back at $600,000, the lender will only lend on the lower amount.  So now the buyer’s down payment will be 20% of $600,000 ($120,000) plus the $50,000 the buyer needs to make up because of the lower appraisal for a total of $170,000.  The buyer is not paying any more for the house, but the loan has dropped from $520,000  to $480,000.

Who can waive appraisals?  People who have plenty of cash available for their purchase can waive appraisals.  They are simply shifting from borrowing to paying cash for that part of the house.  People who only have their downpayment and closing costs saved for their purchase would be in a tough position if their appraisal comes back low.  They would either have to default on the contract or switch to a lower downpayment loan which typically be more expensive.

You can go part way on the appraisal through a “Buyer Gap Guarantee.”  In this case a buyer will include a specific dollar amount that they will pay over the appraised value, but retain the right to negotiate the price for higher amounts.  In our case above, if they buyer had done a $25,000 Gap Guarantee, they would be committed to pay $625,000 and could ask the seller to lower the sales price to that level.  If the two sides couldn’t agree on a lower price, the buyer could walk away without being in default.

VA Loans.  Buyers using VA loans can walk away from contracts that don’t appraise at the agreed on price.  Some VA buyers are adding language saying they will guarantee some or all of the amount above an appraisal.  These buyers may very well keep their word on that.  If they don’t keep their word, I don’t believe that it will be enforceable by the seller.  The VA rules and VA language in our contract make very clear that a VA buyer can’t be held to this.  I don’t know of any court cases where this has been tested, but I believe the VA buyer would be able to walk away without any penalty.

A Word for Sellers.  Buyers are very tempted to waive appraisals right now.  Before accepting an offer without an appraisal contingency, you need to know that the buyer can cover the difference if the appraisal is low.  If your buyer has to default because they don’t have the money, your plans will  be thrown up in the air.  You’ll be weeks down the road and have to get your house back on the market.  In some ways I like the Buyer Gap Guarantee better because it shows the buyer has a plan and they know their limits.  Of course, many who waive the whole appraisal have a plan as well, you just want to make sure they do.

Sellers should also beware of the very high offer that keeps the appraisal contingency in place.  This buyer is likely trying to get you to bite on their high price but will try to get you to lower it to the appraised value once it comes in.  They are basically saying that they will buy it for whatever the appraiser says its worth, which may be lower than your second best offer.

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