Dabl at Home
Why You Don’t Want To Waive Your Appraisal Contingency The Next Time You Buy A Home
Completing an appraisal during escrow is important for ensuring you are paying a fair price for your home and usually required for securing a mortgage.
You probably already know that when you buy a new home, you have to release three main contingencies while in escrow, namely the home inspection contingency, loan contingency, and the home appraisal contingency. During the home appraisal, a qualified lending professional and third party appraiser will assess the value of the home by comparing it to comparable properties in the area, examining the features and conditions of the property, and by accurately measuring the square footage of the house. The results of the appraisal are used to determine if the purchase price is reasonable and if buying the home is a good investment.
If you will be securing financing to purchase your home, you likely will be required to complete the appraisal as a safeguard to the lender. Very few lenders will make exceptions to this rule. This is because the lender will typically only issue the buyer a loan for the value of the home that is determined by the appraisal. Most of the time, the appraisal does find that the home’s value is very close to the actual purchase price so there is no problem. If the appraisal finds the home is worth more than the asking price, then the homebuyers know they got a particularly good deal and it’s just icing on the cake for their investment in their new home. But if the appraisal comes in significantly lower than the home’s purchase price, the homebuyers will either have to appease the lender by paying a larger down payment to make up the cost difference, or ask the seller to lower the price accordingly. If neither of these options are possible, the buyer can cancel the deal.
If homebuyers are paying cash for their new home, they can skip the appraisal because no lender or outside financing is involved in the deal. However, many savvy cash buyers will still go through with the appraisal because it helps them confirm the purchase price is fair. But because this contingency is so important, we were a bit surprised to learn how many homebuyers have been waiving the appraisal contingency entirely. Homebuyers do this as a way to expedite the deal, and can usually shorten the escrow process by up to two weeks. In addition to shortening escrow, this decision can help homebuyers seem more appealing to sellers in a competitive multiple-offer situation.
In hot housing markets, desperate homebuyers are more willing to take risks if it means they get to buy their dream house. However, waiving the contingency is very risky for both the buyer and the seller. In a competitive housing market where the home’s purchase price is above the asking price, there is a significant chance the appraisal may be lower than the price. If the buyer has ample means to cover the difference between a low appraisal and the home’s purchase price, there is no problem. But if the appraisal contingency was waived by an overeager or desperate homebuyer, the financial means to purchase the house may not exist. If the lender or buyer has to back out of the deal for any reason after the appraisal contingency was waived, the seller will be allowed to keep the buyer’s deposit on the home, which means the buyer would be potentially giving up thousands of dollars for nothing. Therefore, the financially smart move is to secure pre-approval for a loan prior to making an offer and not waiving this contingency. While this could mean you have to make offers on multiple properties before you receive an acceptance, you’ll be making a less risky decision and things do have a way of working out when something is truly meant to happen. Eventually, you will find the right property and everything will fall into place.
While the seller does get to keep the buyer’s deposit as compensation for the inconvenience, houses that fall out of escrow tend to seem tainted to other potential buyers. When the house is re-listed for sale, the general public generally assumes there was a problem with the house that led to the cancellation of the deal. This could make it more difficult to get new offers on the home, and the seller may have to accept a lower purchase price when all is said and done. That said, sellers can protect themselves by choosing buyers who can show proof their financing is in order and that they are already pre-approved for a loan. Sellers can also make it clear they are accepting backup offers if the property has a lot of interest, ensuring there will be another party on standby ready to open escrow if something goes awry in the current deal. If sellers are particularly worried about what the appraisal will determine their home’s value to be and want to avoid potential snags down the line, the sellers can request an appraisal of their own home to see if the offers they are receiving are in line with the home’s value.
Ultimately, your decision to waive or not waive the appraisal contingency has to be up to you the next time you buy a house. You’ll need to decide if the home is worth the risk, and if you have the financial means to make up the difference of a low appraisal or can afford to lose your deposit if things go south. As always, we recommend working with a knowledgeable real estate agent who can help guide you in your home buying decisions and negotiations.