Many lenders are now using the appraisal contingency waiver. Are you familiar with it and what has been your experience with using it?

Asked by Serena Russell, FREMONT, CA Tue May 15, 2012

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Mike Chung, , Walnut, CA
Thu May 31, 2012
Waiving an appraisal is a high risk move and I wouldn't do it unless I had a really clear idea on the value of the home. This is more directed to agents representing home buyers because they are ultimately going to be responsible for paying the difference in case the home appraises at a lower value then what was agreed on in the contract. Do your due diligence and amass as many comps as you can that will justify that the value of the home is as close to on par as it can be to the amount that your buyer is willing to offer. If not, this could really come back and bite you in the rear.

For example, a home is listed at $315K, a buyer offers $330K and that offer gets accepted. The Listing Agent, at some point during the process (preferably before the buyer's offer gets accepted) would have informed the Selling Agent that his buyer needs to fill out an addendum stating that they are waiving the appraisal contingency. Which just basically states that the sellers will receive no less than the agreed upon amount of $330K , regardless of what the appraisal comes back as. If the appraisal comes back and the home is "appraised" at $315K, then the buyer has to pay that extra $15K, out-of-pocket to accommodate the difference between the accepted offer price and the appraised value. The reason this can be high risk is because of the potential situation that a home appraises at a much lower value, for this example, we'll say something like around $275K. In that case, the buyer would be responsible for the $55K difference. There are certainly some workarounds, but it will usually come down to more money that your buyer will need to come up with to purchase the home and as a buyer's agent you are obligated to try and limit that as much as possible.

If you are very familiar with the value of the home and have a great idea of what it will appraise for, then you don't have much to worry about, this is where the due diligence comes into play. In the situation that I had, the home appraised at $350K, which was right around where I expected it to, so everything was fine and my client ended up with $20K in equity right when they moved in. But I can't stress how important it is that you know the surrounding areas and know your comps.
0 votes
Carl Hawthor…, Agent, Woodstock, GA
Tue May 15, 2012
This would not be a lender concern. This is a way to protect the seller.
0 votes
Laura Coffey, Agent, Santa Clarita, CA
Tue May 15, 2012
If I am representing the seller I recommend on mutiple offers over list that the buyers remove their appraisal contingency. Reason being that some buyers want the house so bad they bid a ridiculously high bid thinking that the seller will come down once the appraisal comes in. If a buyer removes that contingency make sure they have the funds to go above their loan amount to the price they offered.

When representing a buyer I don't recommend removing the appraisal contingecy unless they a fully aware of the comps, in a multiple offer situation, have the funds to go above market value, and are fully aware if they remove it the seller will not come down price.

I'm not sure what you mean about the lender removing the appraisal contingency. There is a loan called Home path where it is not required.
0 votes
John Dutra, , Fremont, CA
Tue May 15, 2012
Serena,

An appraisal contingency waiver is one used by the buyer to let the seller know that they will take the property regardless of the value amount determined by the appraisal. This is a dangerous waiver unless the buyer is fully aware of the comparables in the area and the risk in removing this contingency.

Removing the appraisal contingency is not the only contingency - most contracts will also have loan and inspection contingencies as well, but what I have seen is that when the market heats up such as it is now, sellers will ask buyers to waive all contingencies in order to get the home.

Lenders will not waive an appraisal as their loan is primarily based upon the risk associated with the loan and the certified value of the property itself (high loan to value - high risk, low loan to value - low risk).

Contingency removal of any sort should be carefully analyzed and only done with the best of data associated with it. Good comparable values of recent sales for an appraisal, no concerns with qualifying for the loan and finally the acceptance of a home As-Is for any inspection contingency removal.

I hope this helps you out my friend.
0 votes
Thanks John. I appreciate your feedback.
Flag Tue May 15, 2012
Pacita Dimac…, Agent, Oakland, CA
Tue May 15, 2012
The only time I am comfortable waiving the appraisal contingency is when the buyer is paying cash.

The market is turning again, and we are seeing multiple offers. There are other ways to submit a strong offer without messing with the loan appraisal and loan approval contingencies.
0 votes
Thanks.I appreciate your feedback.
Flag Tue May 15, 2012
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