Should I Remove the Appraisal Contingency?
In the summer of 2020 in Southern California, we are seeing a wave of buyers competing for the limited number of homes on the market. We are seeing offer prices exceed listing prices which is causing problems with appraisals as homes are selling for more than their appraised values.
What is an appraisal?
An appraisal is an opinion of value from one person who has done research of a local market.
What is the appraisal for?
An appraisal is used by the lender (or bank) to make sure the buyer is not given a loan beyond their appraised value, which they get from the appraiser’s Appraisal Report.
What if the appraised value is higher than the contract price?
The transaction is not affected. The buyer does a happy dance and closes the deal. The seller does not get a copy of the appraisal either.
What if the appraisal comes in low?
This is where low appraisals affect the transaction. The buyer has a commitment from a lender to lend them a certain percentage of the sales price SO LONG AS THE HOME APPRAISES at that price. If the value comes in lower, the bank will only lend the same percentage of the appraised value. At this point, the terms of the contract will determine how that is handled.
Here’s a simple example.
If the buyer is getting a loan for 80% of the home on a $100,000 home, they’d be getting a loan for $80,000 and need to bring in $20,000 as their down payment. If the appraisal comes in at $100,000 or more, no problem! If the appraisal comes in at $90,000 the bank will only give the loan for 80% of $90,000 or $72,000. The buyer would need to bring in $28,000 ($8,000 more than anticipated).
What if the buyer waived the appraisal contingency?
If the buyer waived the appraisal contingency they are already agreed to buying the home at the contract price and will bring in the difference between the appraised value and the contract price, no matter the size of the gap.
NOTE: Just because a buyer waives a contingency does not mean that the bank won’t do one. They still have an appraisal.
If the buyer did not waive the contingency it becomes a negotiation tool for the buyer. There are basically three options: A) Seller agrees to lower the price to the appraised value B) Buyer pays the contract price despite the low appraisal C)The buyer and seller agree to split the difference somewhere in the middle.
Should you waive the appraisal contingency?
That depends. If you want to “win” the home and are competing in the multiple offer situation you may have to waive the appraisal contingency to get the home. If you don’t have enough money to cover the difference then you shouldn’t waive the contingency.
Do you have additional questions about buying and selling? Let us know!