Waiving a Real Estate Appraisal Contingency: Be Careful

If you’re buying a home, the home will need to be appraised. Many of us don’t give much thought to the appraisal. But in a tight real estate market, with buyers vying for a limited supply of houses, many buyers are trying to be more competitive by waiving what is known as the appraisal contingency.

What is the Appraisal Contingency?

The appraisal contingency is closely tied to the loan or financing contingency.

When you contract to buy a home, loan or financing contingency is the ability for the buyer to get financing for the home. That financing isn’t only dependent on the buyer’s credit—it’s also dependent on the appraisal of the home. A lender will not lend more money than a home appraises for.

And that’s a problem in today’s market, because many people are bidding and contracting for way more than what homes are actually worth. So, when someone bids $500,000 for a home that appraises at $400,000, the lender won’t lend the full $500,000. The Buyer fails the financing contingency (in this case, because of the failure to appraise at full contract price), and can normally walk away from the contract without penalty.

Waiving the Contingency

To be competitive, many buyers are waiving this appraisal contingency, essentially saying that even if the home appraises at less than the contract or purchase price, the buyer will still buy the property. But what those buyers are also saying is that they will buy that property, even if they cannot get financing for the full purchase price of the home—and they likely will not, if the purchase price is more than the appraisal price.

This leaves the buyer in a situation where he or she either needs to have the cash to make up whatever amount is not financed by the bank (the appraisal gap), or else, the buyer will have to back out of the deal, and suffer whatever financial consequences come with that, including loss of any and all deposits.

Protecting Yourself if You Insist on Waiving

If a buyer is insistent on getting a house, even one that appraises for less than what the buyer has contracted to pay, there are things that a buyer may want to consider doing, to provide at least some level of protection.

The buyer can consider mitigating risk by agreeing that if the buyer cannot get financing and has to get out of the contract, the buyer will only sacrifice a portion of the deposit, instead of all of it. Buyers can also try to allow for a re-appraisal, in the event that the buyer believes the bank’s appraisal is inaccurate.

Sellers can protect themselves as well, by requiring more significant deposits, or by requiring that the buyer demonstrate that he or she has the cash to make up whatever the lender won’t fund.

While it can be done, it is never a safe practice; be careful if you’re a buyer waiving the appraisal contingency (or any contingency, for that matter) in a real estate transaction.

Real estate closing or questions? Let us help. Call the West Palm Beach real estate lawyers at The Law Offices of Larry E. Bray today.

Sources:

rocketmortgage.com/learn/appraisal-contingency#:~:text=As%20mentioned%2C%20a%20contingency%20in,with%20your%20earnest%20money%20deposit.

forbes.com/advisor/mortgages/what-is-an-appraisal-contingency/