risks involved in removing appraisal contingency when putting down an offer

Asked by folsomdesi, Folsom, CA Tue May 8, 2012

i want to understand how bad is it going to get if i put down an offer on an "active" house without appraisal contingency. we are heavily budget constrained and cannot afford to put more than 10-15k out-of-pocket if the appraisal falls below the bid price. needless to say, you have to bid more than the asking price these days in the folsom area to get noticed. my questions are:
1. what are the odds of the appraisal price going so whacky on a 350k asking price house, that we end up having to pay like 50k out-of-pocket?
2. lets say that did happen and i want to get out. what are the other ways of getting out of the contract without losing any money (within the 17 day period ofcourse), now that i don't have the excuse of appraisal falling short?

please help!!

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Sandhya Murthy’s answer
Sandhya Murt…, Agent, Los Gatos, CA
Fri Feb 21, 2014
I would highly suggest you seek the advice of a local real estate agent expert. Every market is different. In the bay area we are dealing with a lot of ALL CASH offers which dont have loans associated with appraisals. There is a multiple offer frenzy and buyers are willing to pay extra out of pocket just to move into this neighborhood. Talk to your realtor to understand risks associated with removing the appraisal contingency. I am highly against it, but in a low inventory and multiple offer market it may be the only option if you really want the house. If you can not pay the difference of the appraisal then you absolutely should not remove the appraisal contingency.
0 votes
Flag Mon Feb 20, 2017
Steve Heard, Agent, Folsom, CA
Wed May 9, 2012
@Annette Lawrence, it sounds like things are done a little differently in Florida than California. Appraisals are ordered by the lending institution only after a signed contract is in place. The buyer cannot supply the appraisal.

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.
3 votes
Morgan Larson, Agent, Folsom, CA
Wed May 9, 2012
I agree with Steve. In fact I'm working with buyrs in a similar situation right now. Yes, there is a risk involved. There is a likelihood that the appraisal will come in lower than asking price and you will end up paying something out of pocket. Run your numbers and figure out the amount you are comfortable paying above and beyond appraisal. This is a protection I would demand of for my client.

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
2 votes
Steve Heard, Agent, Folsom, CA
Wed May 9, 2012
Agents and buyers are struggling with this issue as buyers as appraisals continue to come in lower than listing price.

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.
2 votes
Cindy Davis, Agent, San Diego, CA
Sun Jul 29, 2012
I would never advise a client to place an offer on a home without an appraisal contingency. It puts you, the buyer, at risk if the appraisal does not come through. Yes, you can get out of the deal within the 17 day period, but at that point you've lost the fees on the property inspection and appraisal.

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!
0 votes
Most cash deals don't have them, especially high end deals
Flag Tue May 23, 2017
Folsom1973, Home Owner, Folsom, CA
Sun Jul 29, 2012
You can get your deposit back if you are unable to qualify for a large enough loan. I think you can also get it back if there are things on the house that need repair and the seller isn't willing to pay.
0 votes
Scott Godzyk, Agent, Manchester, NH
Mon Jul 9, 2012
If you are getting a mortgage you should be covered, as if the property does not appraise, then you cant get a mortgage and should be able to get your deposit back if you are within your time frames and contract. As far as offering more than asking price, that is fine if the house is listed below market value, but one should not be paying over market value. A good buyer broker can guide you through this process.
0 votes
Cindy Davis, Agent, San Diego, CA
Wed May 9, 2012
As a general rule, I would never remove the appraisal contingency, especially when you are using a mortgage.

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.
0 votes
Bob Willett, , Sacramento, CA
Wed May 9, 2012
This is one of those times when I’m glad I don’t have to advise my clients to do either one! I will say that I am seeing buyers go in without an appraisal contingency on a much more regular basis now than I ever have before. If you are up against a cash offer sometimes it’s the only way to make the short list for the counter offers!

To answer your questions directly: 1) It’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 it’s likely to see an appraisal come in 15% low, it’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.
Web Reference:  http://www.SacRELender.com
0 votes
Max Boyko, Agent, Sacramento, CA
Wed May 9, 2012
I would never recommend a client put an offer with no appraisal contingency unless you were either getting an extremely good deal below market value or were buying cash. Even though it seems the market is taking off, appraisals are low-balling and making it extremely difficult to keep deals together.

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.
0 votes
Lance King, Agent, San Francisco, CA
Wed May 9, 2012
I don't work in folsom but I have a hard time believing that the market is so hot there that people don't have appraisal contingencies, especially when properties are often appraising low. Even in San Francisco, one of the hottest markets around right now, people still have appraisal contingencies.

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.

Best Regards,

Lance King/Owner-Managing Broker
DRE# 01384425
0 votes
Annette Law…, Agent, Palm Harbor, FL
Wed May 9, 2012
Let us assume the very best, that would mean you are working with a real estate professional who handles situation just like this EVERY WEEK!

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.
0 votes
Jim Walker, Agent, Carmichael, CA
Tue May 8, 2012
The strategy to use is so deal specific, and must be tailored to the seller, the property and the buyer that the only person who can advise you on this is your buyers agent. We give boiler plate advise to carefully consider the consequences of waiving appraisal contingency in our market conditions advisory form , which your buyers agent has probably given to you to read. But to go beyond that market conditions advisory form, your experienced, knowledgeable agent must have enough of a relationship with you to know your tolerance for risk, your desire to get into a home in a timely manner, your resources, and your housing preferences.

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.
0 votes
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