Try as we may, and we deal with this issue daily, we cannot determine the value with extreme accuracy regardless of the data at hand, and we have plenty of it. Case in point:, I recently listed a home for sale at $369K. We got severl offers. 4 of them over asking price. The seller accepted offer at $376K with a back up offer behind it. It appraised at $376K.
The deal fell through and the seller went to the back up. Less than 10 days after being appraised at $376,000, the new appraisal came in at $365,000!
Remmember, we had 4 people willing to beat the list price of $369,000.
The buyer had an appraisal contingency but the seller refused to sell that low. The buyer came up with another $8000 in cash and the seller came down $3000 to close the deal at $373K.
The real problem is not in determining the value. The buyers are doing that. The problem is what to do when the appraisal comes in below what the buyer is offering. This is why some sellers are writing counter offers demanding that the appraisal contingency be waived or going for other creative solutions.
I just got an offer on a property for $145,000. The agent wrote a clause stating that 'in the event the property appraises for less than $145,000, the buyer will pay up to $6000 over appraised value to a maximum of $145,000'. That's the way things are going here.
@Lance King, take a look at our stats for Folsom: Inventory down 68% from last year. In April, 95 units were sold and 109 went pending. As of this moment there are 87 homes on the market. This is why people are waiving or adjusting their appraisal contingencies. I would not recommend waiving it altogether, but I've sold 3 in the past month or so where the buyers paid above appraised value because to them, the properties were worth more than the appraiser's opinion was.
And yes, you do still have the protection of the inspection and loan approval contingencies. So if there is a repair that needs to be completed or an issue with your loan you would still be able to exit the contract and receive you earnet money back.
Hope this helps
One solution is to keep the appraisal contingency in place but to add a clause in which you agree that if the property appraises for less than the purchase price, you will pay up X amount over it. In your case, you are looking at $350,000 houses and willing to pay $10,000 to $15,000 out of pocket, so you would write the clause to say that if the property appraises for less than $350,000, you will pay up to $15,000 over appraisal price, but no more than $350,000.
This way, if it appraises as low as $335,000, you still get the house and pay what you are willing to. If it appraises for less than $335,000, you can ask for a price reduction.
Both you and the seller have some protection.
Honestly, I don't understand why you would even consider removing the contingency up front!! It's in the standard purchase contract to protect buyers!
The appraisal contingency is an essential component of the California Purchase Contact and is there for a reason.
The ONLY time I would remove the contingency is if it were a cash buyer and I was absolutely certain of the value of the home.
To answer your questions directly: 1) Itâ€™s impossible to say without a lotmore information. Keep in mind that the biggest weight will be given to closed sales, so what properties are being sold for today will have little effect on what the appraised value is. If you are asking if itâ€™s likely to see an appraisal come in 15% low, itâ€™s not very likely, but absolutely within the range of possibilities. 2) The answer here is yes, but you are playing a dangerous game. What if your home inspection is clean or the seller agrees to fix any inadequacies found, but the appraisal is more than $50,000 low? Keep in mind that if the seller decides that you are not being straight and refuses to release your deposit you will have to go to court to get escrow to release it - assuming the judge rules your way.
Other than appraisal, however, you have inspection and loan contingencies which will still be in effect. Technically you can still fall back on these if appraisal goes sour.
The only real ways to get out of the property, typically speaking, are under the inspection, appraisal, and loan contingencies. If this is such a large issue for you then I would find a place you can get an offer accepted on with an appraisal contingency, or be prepared to come up with extra cash.
Lance King/Owner-Managing Broker
The risk you suggest is directly proportional to:
1. Community: is it eclectic, custom homes or comprised of 'cookie-cutter' homes
2. Sales volume: have there been a consistent volume of monthly sales of similar homes
3. Is your lender predatory or a community based lender.
From this data not only can the appropriate value be determined for the home but the appraised value, with extreme accuracy, can be calculated based on the lender involved. Hey, you can even pay to have an appraisal competed BEFORE your lender orders one. The 'red flag' of the need to waive appraisal, suggests there is a known conflict, be it a false conflict created by predatory banks or low sales volumes requiring the appraiser to exercise the bank imposed secondary evaluation parameters. There are many options available that reduce the risk. However, there is no such thing as risk free.
Your real estate professional can clearly explain these options, the risk and benefits, and direct your next action accordingly.
Of course, the the devil is in the details. The contract you sign will determine the options available to you. When you start 'waiving' your rights, you are, by your action, choosing to expose yourself to greater risk. There is just too much unknown about your situation. That's why is always a great idea to have a professional working with you.
While many may chime in about the risk of waiving a contingency, I will chime in and say there is also the risk of lost opportunity if you can't get the house you want while prices are still depressed from the crash. That $350K house was once worth over $500K and someday it will be again.
Then to answer your questions, #1. While a $50K shortfall may be pretty unlikely, a $20K shortfall is less than a 6% difference, so it is a real possibility. Since you can only stretch another $15K, a $20K difference could still be a deal killer (or even an earnest money swallower, if you go commando.)
I have a solution that I would suggest if you were my client. Perhaps your agent has thought of it, too.