In today's crazy market, many buyers are waiving Home Appraisal Contingencies in attempts to get their offer accepted. As an agent, your buyers may look to you for advice on this hot topic. Here are some pointers on Home Appraisals and what it means to waive this contingency.
What is a Home Appraisal?
If a buyer is taking out a mortgage to purchase a home, the lender is almost always going to require an appraisal. Their lender will have a certified real estate appraiser conduct a home appraisal to determine the value of a property. An appraisal is different from a home inspection. A home inspection focuses more on the condition of a house as opposed to its overall value. An appraiser usually only takes the condition of home into account when it impacts the home's value. Appraisers rely heavily on the recent sale of similar homes in the same area, known as comparable sales (or comps). Appraisal standards are typically stricter for government-backed mortgages, like FHA and VA loans.
What is an Appraisal Contingency?
Appraisal contingencies protect buyers in case the house is appraised for less than its sales price. Mortgage lenders use appraisals to determine the amount of the loan they’ll give to a buyer. If the bank’s appraisal falls short, the contingency lets the buyer cancel the contract rather than make up the difference out of pocket.
More often than not, the difference is covered by either the buyer paying more, the seller lowering the price, or a combination of the two. Even if you include an appraisal contingency in the purchase contract, you can still negotiate with the seller to drop the price if the appraised value is lower than the original agreed upon price.
Appraisal Contingencies in Today's Market
In a post-covid real estate market, contingencies can make or break an offer. That’s why an increasing number of buyers are waiving appraisal contingencies. With an increase in demand comes an increase in price, but there are few comparable sales on the market to support the higher pricing, Consequently, many properties are being appraised for less than their asking prices.
So, Should you Recommend Waiving the Appraisal Contingency?
You should only recommend waiving the appraisal contingency if you feel it is absolutely necessary. That is, if you believe it is the only way to get your client's offer accepted, or you have checked the comps and it is very unlikely for the appraisal to come in low.
Having a sales contract terminated because of appraisal issues is rare, and accounted for less than 1% of real estate transactions last year, according to the National Association of Realtors. But even in that case, it’s best to ensure your clients have extra cash available in case they have to make up the difference.
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