As multiple offers become more common the issue of whether to include or waive the appraisal contingency is one that many buyers now face. This is a great explanation of the risks and benefits.
The real estate market is back in extreme seller market territory again. Sellers are partying like it's 2004 - even though it's much harder to get a loan, we have sequestration in effect and the economy is still sluggish. If you are poised to sell your home, especially in certain zips and price ranges, you will be in the driver's seat. Buyers on the other hand are struggling to find a place to live. I just wrote a beautiful offer for one of my buyer clients that would have been ratified in two seconds just a few months ago, but this week, it got rejected because another buyer waived the appraisal AND financing contingencies.
It looks like if you really want to buy a house right now in Arlington, at least among some price ranges and neighborhoods, waiving the appraisal is a serious consideration you need to make in order to beat out other aggressive buyers.
So, what exactly does this mean? What happens if you do waive appraisal vs. don't waive appraisal?
An appraisal is an objective 3rd party opinion of value, required by the lender if you are getting a mortgage. Lenders will base their loan off of the "appraised" value, not the sales price.
In the contract, you have a financing addendum, unless you are paying cash. In this addendum, you have the option to have so many days to get an appraisal on the property, making it "contingent" on the appraisal. If it comes in low, and this contingency is in place, you can ask the seller to lower to the appraised price or walk away and keep your deposit. If you waive this contingency, you are promising to pay the price you agreed to on the contract, without regard to what the appraiser thinks the value of the house is.
Because the market is rapidly appreciating due to an imbalance of low supply vs. great demand, people are paying more than recently sold comps. This makes it tough for homes to appraise at these escalated sales prices. If you are a seller and you get 4 offers, you will most likely take the one that waives the appraisal, because it's the sure thing. Deals fall apart over low appraisal values all the time.
If you do waive the appraisal, it means you will put more money down than you originally planned. For example, you buy a $500,000 house and plan to put 20% down, which is $100,000. But the appraisal comes in at $480,000, that means the lender is only going to loan you enough for a $480,000 sales price. If you pay $500,000, you need to make up the difference with a larger down payment of $120,000. Not a big deal if you have plenty of cash, but a make or break deal if you only have 5% or 10% to put down. If you keep the appraisal contingency in place, you can renegotiate price with the seller and the seller can choose to lower it, you can walk, or you can split the difference.
As a seller, again, taking a contract without an appraisal contingency is a no brainer. Most sellers would rather sell for a bit less with no appraisal, then higher with an appraisal, because the one without the appraisal is a sure thing.
As a buyer, if you have flexibility with your downpayment, waiving the appraisal contingency is a way to win a bidding war. Keeping the appraisal contingency very likely to cost you the house, however.
Coral Gundlach, CRS
Realtor serving Arlington, Fairfax and Loudoun Counties in Virginia
Thinking of buying or selling a house in Arlington, Virginia or surrounding Northern Virginia communities? There is no general "good time to buy or sell," it's a very personal decision. Contact me for a confidential consultation based on your needs and a free market analysis.