Waiving an appraisal contingency often leaves a buyer financially vulnerable but will push their offer to first place- before cash buyers. To determine if an appraisal contingency is right for you, ask yourself, “How much do you want the home?”
The housing market is on fire in the Phoenix-Metro area, and many are scrambling to make offers on the limited supply of homes available. Sometimes it’s hard to compete against cash offers if you will be relying on financing. A frequent practice to give buyers a leg up against cash buyers when they submit an offer is to waive the appraisal.
In an effort to alleviate worries over the appraisal coming in below the purchase price, many buyers are turning to an appraisal contingency waiver. Basically, it lets the seller know that the buyer agrees to make up any shortfall that results between the purchase price and the appraisal value. However, the practice is not without risks.
Partially or Entirely Waiving the Appraisal Contingency
In an effort to make their offer more appealing and effectively compete against cash buyers, a buyer will use a clause addendum that lets them waive the appraisal contingency. This is a risky plan and can often backfire if the buyer waiving the appraisal contingency does not have a sufficient amount of cash.
Sometimes, the appraisal is a complete surprise, and the amount of the shortfall is huge. In such a circumstance, the buyer will have to come up with a sizable chunk of change. Not to mention, when going this route, even if you have the money to make up the difference you will end up getting the home but already be upside down on it from a financial perspective. You’ll have spent more than the home was appraised for!
Limiting the Shortfall Amount
A buyer does have the option to minimize the risk by limiting the shortfall amount that they will be faced with contributing if the appraisal comes back substantially less than the purchase price. If you go this route, then the buyer will specify an amount that they will contribute. This option helps protect the buyer from any huge financial surprises and also prevents them from spending more than they can afford.
A buyer who decided to limit the shortfall amount should examine their available funds so they can make an informed decision about the amount they can afford. Remember, a buyer should also be prepared to offer proof of funds to show the buyer that they can make up the appraisal shortfall and are not simply wasting everyone’s time.
It’s only natural in a hot real estate market to seek ways to compete. An appraisal is a natural part of the buying process, but when used correctly it’s a way to make an offer stand out above another buyer.
Buyers can appease and ease a seller’s hesitation with an appraisal contingency.
Waiving the Appraisal Contingency
A buyer who opts to waive the appraisal contingency will no longer have the right to any form of low appraised value protection. Remember, an appraisal lets a buyer walk away from the contract with their earnest money if the property appraises below the sales price. However, if you opt to waive the appraisal contingency and then you walk away from the offer then you’ll forfeit your earnest money.
Sellers typically like it when a buyer opts to waive the appraisal contingency and the buyer’s offer instantly moves to the top for consideration. This is especially beneficial for sellers who are trying to sell in a market, such as Phoenix, where homes are priced over the appraised value. In highly competitive markets, sellers favor buyers who waive the appraisal contingency.
The buyer’s loan amount is always based on the lower appraised value. If the sales price exceeds the appraised value, then the buyer will have to pay the difference.
Understanding Appraisal Contingencies
Before you decide to waive the appraisal contingency to surge ahead in the home buying process, let’s look at exactly what you are giving up. Appraisal contingencies are put in place to not only protect you but also your lender, so no one ends up overpaying for a home. They are a form of financial protection.
Home Prices are a Matter of Perspective
If a home appraises for more than the asking price then everything is fantastic and the sale moves forward, but in some situations, the appraisal comes back lower than the asking price. This happens frequently in a seller’s market where supply and demand are pushing prices. Phoenix is a seller’s market, and the supply of listed properties is seriously depleted which is driving the prices higher than appraisals. One must remember that prices are all a matter of perspective.
What to Do if an Appraisal Comes in Lower Than the Asking Price?
If you have an appraisal conducted on a home and it comes in lower than your offer, then you can request a second appraisal to truly determine the home’s worth. However, you’ll have to have a concrete reason for why you believe the first appraisal was wrong.
You can opt to make a larger down payment to make up the difference between the sale price and the appraised value.
Many buyers also ask a seller to lower the price if the home is appraised for less. However, in a seller’s market, this will rarely happen.
The appraisal contingency is the buyer’s protection. If the appraisal is low, then the buyer can walk away with a full refund of the earnest money. You’ll need to decide exactly how much the home you want to buy is worth to you. If you have money in the bank and you don’t mind paying more than the appraisal price for a home, then you should waive the appraisal price in Phoenix so you can come out ahead of cash buyers and purchase the property you desire.