Is it wise for buyers to waive the appraisal contingency? Appraisals continues to cause aggita among many in the home buying process, is the answer to eliminate it? Current offers reflect the “current” while appraisals reflect the “past”; an inherent conflict especially in a transitional market. When inventory is tight and seller markets exist, the "cleanest" contracts get the most attention. Buyers with mortgages must have an appraisal, but there are ways to ease a seller's mind even when an appraisal is required. Cash buyers MUST TRUST their agent if consideration is given to waiving the appraisal contingency. The appraiser cares less about the deal, in a sense, they offer the ideal third party disinterested view. Has the buyer agent been completely honest and transparent??
Waiving the appraisal contingency is done to present a more streamlined and competitive offer. Completely eliminating the appraisal is an option only for cash buyers. Is it wise? In many instances, no. In fact, in most cases it's stupid...in most cases, not in all. Much depends on the buyer's agent; has the agent presented enough COMPARABLE data to provide confidence in the deal. Factors to consider:
- Can the buyer’s agent evaluate the property as an appraiser will using standard appraisal guidelines? The majority of agents are woefully ignorant of what an appraiser does or what is required of them.
- Can an appraiser be consulted during the due diligence period to render an opinion of value but not a full appraisal? This allows the buyer to terminate without penalty before being contractually obligated.
- Removing the appraisal contingency is a big "out". Has the buyer's agent included plenty of time for other due diligence research but still kept it short enough to make it appealing?
Cash purchases are built upon speed, not being subjected to the qualms and whims of the mortgage process is a huge advantage to all parties. However that appraisal clause provides an opportunity to renegotiate price in the event of a low appraisal, it's a safety net. But, if adequate research has been completed and opinions are supported by current data, going in sans appraisal contingency can be a game changer.
What about Joe Buyer getting a loan that mandates an appraisal, what are the options there? Primarily one; waiving the right to renegotiate contract price in the event of an appraised value below contract price. This is a huge move, thoroughly understanding the risk/reward is critical! Factors to consider:
- Is Joe's agent competent? That's not argumentative, that's an honest question as the real estate sales industry has NO standards.
- Can the buyer’s agent evaluate the property as an appraiser will and render an opinion on where it might appraise? Not as an agent; as an appraiser with consideration to the underwriting process. The majority of agents are woefully ignorant of what an appraiser does or what is required of them.
- Is adequate data available to formulate an opinion? In some cases, not enough data may be present to provide an adequate confidence level with the buyer. If the home is unique or in an area with few sales, it might be best to leave things alone.
- If an appraisal comes in low, can the buyer cover the difference between appraised value and contract price? The mortgage is based upon the lower of the sale price or appraised value. That spread will come out of the buyer's pocket.
- Is the buyer’s agent experienced enough to write the offer and still maintain a level of protection for the buyer? A strong working knowledge of contract law is important as removing ability to renegotiate an appraisal below contract price removes a major buyer “out” and could result in major contractual issues. There are workarounds but it takes experience and skill to use them.
A major variable is the appraiser themselves; just as there are ineffective agents there are ineffective appraisers. The data might support removing the ability to renegotiate sale price but a low appraisal could result anyway. The key is to clearly understand all aspects of the move; the benefits and the liabilities.
Removing or altering the appraisal contingency can be a very effective tool. It can also do severe damage in the hands of an ineffective buyer’s agent or misinformed buyer. Any buyer that considers this must have absolute confidence in their agent; any agent proposing this must have absolute confidence in the data and their ability. The Hank Miller Team has successfully used this maneuver several times over the years; but never without running all scenarios with buyers. As those buyers saw, when properly applied this can be the edge that makes an offer the winning one.
