When you set out to purchase a home as buyer you will eventually find a property you love. At that point, you’ll sit down and construct on offer to purchase.
The offer will spell out all of the common terms and conditions such as the offer amount, what you’re financing, any contingencies, and the closing date.
Buyers and sellers will often negotiate these items before reaching an agreement. One of the vital discussions you will probably have with your real estate agent is surrounding the real estate appraisal.
Your agent will likely advise you to either add an appraisal contingency or waive it depending on the type of real estate market that presently exists.
Understanding how an appraisal contingency works will become paramount to the decision process.
Let’s look at what you should know about appraisals and specifically this situation.
What is a Real Estate Appraisal?
When you’re buying a home and getting a mortgage, most of the time the lender will require a home appraisal.
The lender will hire a licensed appraiser who will evaluate the fair market value of the property. The appraiser will visit the home, take notes, measurements, and photos.
The will use the gathered information and compare it against other comparable properties to determine the value.
Special attention will be paid to the size of the home, condition, amenities, bedrooms and bathrooms, and the location. Adjustments will be made up and down vs. other comparable properties in close proximity to the subject.
The appraiser will arrive at the final value and will submit an appraisal report back to the lender. The buyer pays for the appraisal as part of their closing costs.
Sometimes a lender will waive the requirement of an appraisal when they know there is significant equity in the property. Generally, lenders will consider forgoing the appraisal when there is more than 25 percent equity in the home.
Adding an Appraisal Contingency in a Buyer’s Market
While there is often an implied condition from the lender of having a home appraise, a buyer may need a contingency in order to escape the sale.
Adding an appraisal contingency to a real estate contract is far more common in a buyer’s market.
In a buyer’s market, it is possible home values could be sliding downward. It makes sense that a buyer would want to protect their financing interests.
Since appraisal contingencies are far more commonplace in buyer’s markets, sellers are far more likely to accept them.
Where you might find some trouble in getting an appraisal contingency is when there is a shift from a seller’s to buyer’s real estate market. At the beginning stages of any market change, buyers and sellers are reluctant to realize things may be different.
Often real estate agents are left to convince their clients what is happening in the current market.
Waiving an Appraisal Contingency in a Seller’s Market
It is the exact opposite in a seller’s market. A large percentage of buyers in an effort to make their offer more attractive to a seller will waive their appraisal in the offer.
The waiver language will state that in the event the appraisal comes in less than the contract price, the buyer will cover any shortfall.
Buyers do this because in strong seller’s markets there are numerous bidding wars. Buyers will do whatever is necessary to win the bid.
One way of making their offer stronger is by waiving the appraisal. Many buyers are competing against cash buyers when the market is white hot.
Without waiving the appraisal, prospective buyers will consistently lose out to other offers will more attractive terms.
A smaller percentage of buyers will offer an appraisal gap clause which will limit their exposure to a low appraisal.
For example, a buyer could guarantee they will only cover up to $25,000 for an appraisal shortfall. Doing so offers the buyer a limit to which they will have to come up with additional down payment funds.
Options When The Appraisal Comes in Low
When the appraisal comes in low, what happens next is determined by what you have agreed to with the seller. If you waived the appraisal, you will need to come up with additional down payment funds to satisfy the lender.
If you have an appraisal contingency in your real estate contract there are a handful of options including the following:
- Terminate the sale and get your earnest money deposit back
- Ask the seller to reduce the price to the appraised value
- Come up with additional funds to satisfy the lender
- Challenge the appraisal if you feel the appraiser made a mistake on value
- Get a new mortgage company which will trigger a new appraisal
- Offer a compromise to the seller – they come down some in price and you come up with more down payment to bridge the appraisal gap
Sometimes you can get a mortgage commitment that will have a subject to appraisal clause as one of the conditions. Without an appraisal contingency a buyer could be forced to proceed.
Final Thoughts on Appraisal Contingencies
Before waiving or adding an appraisal contingency, it will be essential to speak with your buyer’s agent about the present market conditions.
Much of what is happening in the current real estate market will dictate what you should do. Lean on your agent for guiding you properly.
If you’re unsure of anything you are signing speak to a real estate attorney before moving forward.
Source: Realtybiznews.com
