Home Buying in San Jose>Question Details

som, Home Buyer in Santa Clara, CA

problem of appraisal contingency in offers

Asked by som, Santa Clara, CA Sun Feb 10, 2013

We have been actively giving offers on single family homes. We have been approved of a bank loan of 700K . So far we have lost 3 offers only because we were not comfortable in removing appraisal contingency. People with cash can make up the difference between bank appraised value and offer value. We have a wiggle room of only 10K max.This is especially true for homes 40 yrs ., which are remodelled and priced at 550k .Is the comparative market analysis given by our agent a true marker, even close of the bank appraised value.
1.What are the markers for the bank to evaluate a property
2. Is there even a slightest chance of owning a SFH for buyers like us who have little wiggle room,who cannot afford to remove appraisal contingency

Help the community by answering this question:


The appraisals done for lenders vary dramatically even for the same lender. Some are quite accurate others extremely conservative. If you are using an experienced real estate agent she will probably be at least as accurate as the appraiser but that won't help you get the mortgage.

Just as top real estate agents can eliminate problems more effectively, top loan agents can significantly increase the odds that a mortgage can be obtained for a purchase. A top loan agent may offer an interest rate that is not the lowest but they are more successful getting a mortgage for a purchase.

The seller normally wants to know as certain as possible that the sale will be completed. A loan contingency puts you at a significant disadvantage. 2012 had a record number of homes bought using all cash:

It is possible to purchase a home while having a loan contingency but almost certainly your offer will have to be higher than a competing offer with no contingencies. Depending on your circumstances and the property, you could make a non-contingent offer and have only a low risk. There is no one size fits all solution. Your real estate agent has to have experience with the alternatives to be able to give you the best advice. This is probably the main reason an experienced real estate agent gets to know loan agents and which ones they can recommend. The Reator's recommendation will vary depending upon both the buyer and the property.

An experienced real estate agent faces this problem many times. Again, the problem can be handled to minimize risk but there is no one size fits all solution.

Juliana Lee
Cell: 650-857-1000
Top 3 agent nationwide at Keller Williams Realty

Over 25 years experience
Over 1,000 home sales in Santa Clara and San Mateo Counties

San Jose real estate information at http://julianalee.com/san-jose.htm
Web Reference: http://julianalee.com
2 votes Thank Flag Link Mon Feb 11, 2013
Thank you for your question Som:

Yes, the market is rising very rapidly right now.

Appraisers are required to use closed sales to determine and document the Fair Market Value of a property. The problem that the appraiser has is that during the 30 days that it usually takes to close an escrow, the market has already risen. The day the sale closes that market value is already out of date.

The appraiser is vary limited in his or her ability to account for the change in the market because the appraiser cannot document the increase, in a rapidly rising market like this one, in the market value during the time that it took to close the sale.

I agree that you should not remove your appraisal contingency until you have the appraisal back, otherwise you put your deposit at risk.

Because the market is rising so rapidly, the appraisal will probably be less than the current Fair Market Value. That is why the listing agent will demand that the buyer be willing and able to make up the difference in cash between the price that is offered and the amount of the appraisal.

This makes it very difficult for a buyer who does not have a lot of extra cash to make up the difference between the appraised value and the amount that must be offered to win the sale, which is often a bidding war between multiple offers.

I recommend that you keep trying. You will probably have to make a number of offers before you can get an offer accepted. It is not uncommon to have to make 10 or more offers before you can get an offer accepted in this market. That is particularly true is you do not have a great deal of cash.

Another alternative is to consider a location where prices are not rising so fast, although that will probably mean that you have a longer commute.

Thank you,
Charles Butterfield MBA
Real Estate Broker/REALTOR
American Realty
Cell Phone: (408)509-6218
Fax: (408)269-3597
Email Address: charlesbutterfieldbkr@yahoo.com
2 votes Thank Flag Link Sun Feb 10, 2013
Charles that is a great response! I am definitely experiencing similar and advise my clients similarly.
Flag Mon Feb 11, 2013
We are having the same exact problem here in San Diego. I would NEVER advise a buyer to remove the appraisal contingency. No buyer should pay significantly more for a home than it's worth.

What you did not mention is whether you are working with a Realtor. If you are trying to do this by yourself, forget it...the market is too difficult right now. Realtors know the inventory, the listing agents, and often hear of homes that have not yet hit the market..

Keep plugging...bid on everything and something will eventually break...it always does.

Best of luck.
1 vote Thank Flag Link Mon Feb 11, 2013
Seller goes into escrow at 158,000, appraisal comes in at 160,000. Does the seller have to sell at 158,000 ?
0 votes Thank Flag Link Thu Mar 3, 2016
Yes! The seller doesn't even see the appraisal anyways. The goal is that the appraisal comes in at value and everyone is happy.
Flag Mon Mar 7, 2016
Good morning Som,

Unfortunately, you're caught between a rock and a hard place. But I have some suggestions to help you get what you want on your terms.

ROCK: HOT market in your area leaving many Buyers in the dust and more Sellers in control of the negotiations. While this might not be a true "Seller's Market," what I've read about California markets of late is they are certainly leaning in favor of Sellers. Thus, given the options between several Buyers a Seller might lean toward what they consider the "strongest" deal with the best terms (including no appraisal contingency).

HARD PLACE: No Wiggle Room. Here in New York we use Attorneys and legally binding Contracts of Sale for home purchases. I don't know of ANY Attorney here in NY who would allow their Buyer clients to sign a contract without the appraisal contingency. That having been said, many Manhattan high-end Condo Buyers did exactly that, and the news reports have indicated they're sorry they did, after the fact. You need to protect your precious down payment, so you truly need that Appraisal contingency because property values aren't so strong yet that you can gamble with your money.

Suggested Strategy: In negotiating I find that Buyers must focus on their strengths so as to negate any weaknesses. What are the other points in your qualifications as a Buyer that your Agent should highlight when presenting an Offer?

Typical Points:
-No Need to sell another property to close on the new one.
-Mortgage Financing ready to ROCK: this is where your Mortgage Professional comes in. A few words from your Mortgage Pro can go a long way to assuring a Seller of your ability to secure mortgage financing (even in the IMPOSSIBLE lending environment of 2012-2013) and to do so quickly. See my blog linked below about this.
-Ready to close faster than other Buyers:I know you Californians can close escrow in days (as opposed to months here in New York), but find out how you can present an even faster closing to your potential Seller.

Last suggestion: maybe your real estate agent just isn't strong enough in the negotiating department. Maybe you should consider hiring an exclusive Buyer's Agent.

I've worked in this business for 23 years; I've seen my clients successfully negotiate and purchase homes on THEIR terms even during the BOOM! It takes hard work, supreme organization and persistence to win at negotiating, but you can win. Don't give up hope because of a single stumbling block in your path. Find a way around it and you'll get your home!

All the best!

Trevor Curran
NMLS #40140
Mobile: 516-582-9181
Office: 516-829-2900
Fax: 516-829-2944
PowerHouse Solutions, Inc.
185 Great Neck Rd, Suite 240
Great Neck NY 11021
Licensed Mortgage Banker – NYS Dept. of Financial Services

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0 votes Thank Flag Link Mon Feb 11, 2013
Yes, you have a chance to get a home. First, you probably can get away without the appraisal contingency if you are using more conventional loan contingency. Loan contingency implies bank appraising the property. Make sure that the loan parameters including the interest rate are properly spelled in the offer. I would use the appraisal contingency only with a cash purchase. You realtor should be able to explain you the fine nuances between these two.
Web Reference: http://talisrealestate.com
0 votes Thank Flag Link Mon Feb 11, 2013
Hi there,

You need more wiggle room!! 10,000 will not get it in today's market. You may want to try and get approved for a higher amount or go for a lower priced home. either of these two scenarios will
give you more wiggle room. I have a great loan agent.

You need to have a good Comparative Market Analysis done on the home you are targeting to buy!
Feel free to give me a call, and
we can get your questions answered more precisely.

Diana Valverde
Davey and Associates Premier Real Estate and Property Management
0 votes Thank Flag Link Mon Feb 11, 2013
1. Banks hire appraisers to look at value of resale homes using the Comparative Market analysis approach. They usually look at similar homes that have recently sold in the last 3 to 6 months, and current pendings..sometimes active inventory. But in this market, buyers in competitive situations normally do not look at the past solds to make their offers...as you've learned.

And there are ways to structure your offer without fully releasing your appraisal contingency while giving the sellers some assurance of paying up to $10k over appraised value. That would increase the strength of your offer somewhat.

2. While it's true that it is a very competitive market for buyers with the lack of inventory, there is a home out there for you if you are motivated to own a home today at these historically low interest rates. You just need to create a strategy to find that home in an area you can afford. The key word is "strategy." You will need to work with an agent who can communicate clearly with the listing agent, asks the right questions to help her/him create the strongest offer possible that works for you, works with an experienced loan officer who can create a loan package that's right for you, and think out of the box to get your offer accepted. Sometimes the seller is not always looking for the highest offer...

Good luck!
0 votes Thank Flag Link Sun Feb 10, 2013
Hi Som

Sorry for your loss.

Actually Banks do not do appraisals, it is the Appraisal Company who sends out the
Appraiser who is an a independent third

They look at Recent Sales and Comparables as markers. The appraisers can
Be wrong sometimes, where they do not understand the value of schools, or are from
Out of county.

Keep trying.

Good luck.
Web Reference: http://ruthandperry.com
0 votes Thank Flag Link Sun Feb 10, 2013
Why would you lose 3 offers "because we.....contingency"? If the APPRAISAL was done; either it made the deal acceptable, or it didn't. Why couldn't you remove the Contingency at that point?

If you only have $10k "wiggle room" then the App Cont would be critical for you.

Yes, the CMA should be close to the Appraised Value.

1. You'd have to ask each Bank.
2. Particularly in this Market; you'll have to submit more Offers to get one accepted.

The bottom line is, you surely cannot want to pay way more than a property is WORTH! Do you?

The Appraisal Contingency is designed to protect the Buyer; do you want to try to buy without it?
0 votes Thank Flag Link Sun Feb 10, 2013
Hi Som,

There are other factors other than the appraisal contingency in getting or not getting an offer accepted. The amount of your deposit and down payment and the length of time for inspections are others. It's the totality of the offer that matters. The other question that's vital is how open are you to where you want to live? You're in a good price range depending on your desired location. There are listing agents who understand it's not about the highest offer. It's about the offer with the biggest chance of closing.

Basically what I'm saying is you can write an offer within the comp range and still get it accepted.

Are you looking in areas with several recent sales or are you looking in areas where there's very little turnover? My biggest advice, stay in your comfort level (price and terms) and be patient. It's not easy for buyers.

Good Luck in your search for a home.

David Sciplin
Coldwell Banker Residential Brokerage
0 votes Thank Flag Link Sun Feb 10, 2013
Appraisals are slowly catching up, but it is really hard for buyers right now. If it continues to be a seller's market you will continue to see an issue with appraisal contingencies. On a good note, more and more properties are meeting appraisals because appraisers are noting/accommodating for the upward trend.

To help with your main questions:
1) Banks are using appraisers to help with estimating the price of properties. Something we agents cannot control.
2) Your chances of owning a SFR are getting better because we are slowly seeing fewer short sales and foreclosures. This means, there are fewer and fewer discounted homes... less profit and ultimately more work to make money.

Finally, I would like to note that if you can afford a $700K loan, your "market" is not as competitive as the $500K or less market... which is ideal for rentals.

Good luck and stay vigilant... interest rates are going up!

0 votes Thank Flag Link Sun Feb 10, 2013
som -

So many buyers are in similar situations and as agents we are seeing this uncomfortable position buyers are being placed in to compete. The reality is only you can decide your comfort level, ability to make up the difference, and make offers in this market.

Appraisers are catching on that in many of our Silicon Valley neighborhoods we are seeing anywhere from 3-17% over last sale. Appraisers typically look at last 3 months of sales within .5 mile unless a comparable property is not found. Then they can expand the parameters or make the adjustments. I always prepare reports to provide the appraiser as background for what is going on in the area. The more information they have, the more accurate the appraisal.

I have written "boundaried" offers where the buyer is willing to make up X dollars. If you haven't already tried this with your agent, it may be worth discussing.

In the end, you are smart to know your limits and make the offer that you can support. The market is very dynamic and if more homes come to market, this pressure of no contingencies will ease.

Good luck!
0 votes Thank Flag Link Sun Feb 10, 2013
Good response CJ.
Flag Mon Feb 11, 2013
Hi Som,

I am a Mortgage Consultant and not a Realtor.

Real Estate pricing is purely a supply and demand economics. You cannot price it like you evaluate Gold or Silver.

Using Mortgage as a tool, there is a lot more room for you to wiggle than you think.

Broker Jacob
NMLS 327086
DRE 01790347
0 votes Thank Flag Link Sun Feb 10, 2013
Hi Som,

In this very competitive sellers market it is not uncommon for buyers to offer no appraisal contingencies in an offer to buy a home. That said, if you are not comfortable doing so, especially with so little wiggle room, I would recommend you not do so. From what real estate experts have alluded to, it is likely that in the coming months more homes will be available on the market. Perhaps this influx in inventory will allow buyers such as yourself get into a home without having to remove your appraisal contingency.

Hope that helps.

David M Setti
0 votes Thank Flag Link Sun Feb 10, 2013
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