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Appraisal Contingency Waiver
Here we find ourselves again in unfamiliar territory of the real estate world.Well, unfamiliar since I have been a Realtor at least. Today’s home buyers are finding themselves having to pull all kinds of tricks out of their bags to get offers accepted. Just shy of offering up one of their children or kidney it seems. Over asking price is one thing but now we are seeing appraisal waiver contingencies. New unsuspecting buyers have no idea what this even means. Heck some seasoned agents don’t even know what this means. Let me break it down for you.
What’s An Appraisal Contingency?
Contingencies are conditions that must be met and each includes a specified time frame.
Most purchase agreements include three contingencies:
- An appraisal contingency stating that the home must meet the price you’ve agreed to pay (or higher) when appraised.
- A finance contingency stating that the deal depends on the approval of your loan.
- An inspection contingency requiring that the home pass a home inspection.
When Do You need an Appraisal Contingency?
If a lender is involved, you’ll need an appraisal and should consider an appraisal contingency. If you are paying cash you can forego an appraisal. The lender will want to make sure the investment that they are loaning on is a sound investment so will require an appraisal.
Who Pays For The Appraisal?
The appraisal is an extremely important part of the home buying process, typically paid for by the buyer. It’s considered important because the value determined by the appraiser is the maximum amount that can be loaned out by a mortgage company.
The lender will retain a state-licensed registered appraiser to determine the fair market value of the home. The appraiser arrives at that value based on the home’s general condition, location and comparative sales (or comps) in the area.
What Happens If The Appraisal Comes In Low?
If the appraisal comes in too low, the buyer can petition for a second appraisal.
If you go this route, be sure to make your lender aware of the reasons you think the home is worth more – maybe that’s recent comps the appraiser may have missed or something of value that’s not really visible like radiant floor heating.
If the value is still too low, there are three options:
- You, as the buyer, can agree to bring more money to the table.
- The seller can reduce the price to meet the lower property value.
- Both parties may agree to split the difference in any combination.
The contract may be terminated by either party if you can’t agree.
So that brings us back to the subject at hand:
What Is An Appraisal Contingency Waiver?
This is where you agree to pay the full amount of the contracted price, even if the appraisal comes in low.
This may be a great strategy and very beneficial in a multiple-offer situation, but you should understand that you’re taking a risk. If the home appraisal is lower than the agreed purchase price, the contract is still valid, and you’ll be expected to complete the sale or lose your earnest money or pay for other damages.
For example, if you’re seeking a $300,000 mortgage but the appraisal comes in at $290,000, the mortgage lender is only able to finance $290,000. This leaves you to pay the remaining $10,000 out of pocket, as well as the down payment and other closing costs.
By agreeing to this and paying the difference, please realize your real estate investment will have negative equity. The amount of time your investment will have negative equity will depend on the amount you paid above appraisal and the real estate market. No one can predict how that will go, as witnessed in 2008.
So, my motherly advise to you is not to use an appraisal contingency waiver. It is better to wait for a more stable market than to risk getting in to a bad investment.
Jennifer Hunter, Realtor
Southern Tradition Real Estate