What to Know About Waiving An Appraisal

Should You Waive The Appraisal When Buying Real Estate?

Appraisals are a way to estimate the value of property. They can be used to help with taxes or to sell a property. There are many different types of appraisals, and they can vary in price.

For purposes of this article we will discuss appraisal waivers as they pertain to buying a home. For those who are not aware both a buyer and a lender can waive an appraisal.

In the case of a lender waiving an appraisal, they do it when they know there is substantial equity in the property. The mortgage lender feels like the don't need to worry in the event of a buyer defaulting as their is ample equity in the event of foreclosure.

They will be able to get their money back with ease. In terms of a buyer waiving an appraisal that is a whole different ballgame.

Before we discuss the pros and cons of an waiving an appraisal, let's go over the definition of one.

What is a Real Estate Appraisal?

An appraisal is a valuation by a licensed appraiser who determines the fair market value.  The appraisal can be used to help determine the amount of a loan, determine the taxes due, or to sell a property.

The most common purpose of a real estate appraisal is to ensure a lender isn't making a mistake granting a loan to a borrower. They want to ensure the value of the property vs. the purchase price.

Lenders want to see the appraised value come in at the purchase price or higher. When the appraisal is lower than an offer it can create issues.

How Does an Appraiser Prepare an Appraisal?

A licensed appraiser will visit a property and take notes, get measurements, and take pictures. They will use this information to compare against other similar properties in the general location that have sold.

These comparable sales are known as "comps" in the real estate industry. Appraisers will be looking at very specific information including the square footage of the property, number of bedrooms and baths, age, condition, and amenities. The lot and location will also be significant factors in their valuation.

These data points will be compared against other like properties. Adjustments will be made up and down when compared to the subject property. All of the compiled data will be used to formulate a final appraised value.

Real Estate agents do similar work to figure out fair market value. It's known as a comparative market analysis.

What Are The Benefits of an Appraisal?

The appraisal protects the interests of both the buyer and the lender. Very few people want to overpay for a property. The appraisal ensures that they don't. It gives them the information needed to make a sound business decision.

The appraisal also protects the interests of the seller. They don't want to sell a property for less than it's worth. The appraisal ensures that they receive the market value for their property.

Some sellers will have their house appraised to establish a fair listing price. The percentages are smaller though as most will rely on a real estate agent to provide fair pricing.

What is the Cost of a Home Appraisal?

The cost of an appraisal is born by the buyer. It will become part of their closing costs. The typical cost of a real estate appraisal will vary by location. A good estimate is between $350-500 dollars.

As mentioned previously, a lender will sometimes waive an appraisal when they feel there is plenty of equity. You will almost certainly need the equity to be more than twenty percent for it to happen.

Why Do Home Buyers Waive Appraisals?

The most common reason a buyer will waive an appraisal is to make their offer to a seller more competitive. In hot seller's markets there are bidding wars on numerous properties.

Buyers are often up against many other buyers. When a best and final offer is requested buyers need to put their best foot forward. Waiving an appraisal will make an offer more attractive to a seller. With homes selling so far over asking, there is a chance the home won't appraise.

A seller's worst nightmare is to have accepted an offer and then find out a month later the buyer is not proceeding based on a low appraisal. By waiving the appraisal it takes a worry off the table for sellers.

In addition, many buyers are coming to the closing table as cash buyers. They are not getting a mortgage. Buyers are pulling out all the stops to get their offer accepted. A cash offer is hard to beat because it gives sellers so much security.

To level the playing field just a bit, it's now common to see buyers waiving the appraisal. The appraisal from the bank will still take place but the buyer will cover any appraisal gap.

Removing the appraisal contingency increases the odds a buyer will put the property under agreement as the winning bid.

Final Thoughts

Buyers should only waive an appraisal when they have the down payment funds to make up the difference between the purchase price and appraised value.

Without having the necessary funds would leave a buyer unable to get a mortgage. They would end up losing their earnest money deposit, which could be significant.

So the pros of appraisal waivers is it could help you nail down the house you love. On the downside, you won't have the protection in the event you are overpaying for the property.

Hopefully, you now have a better handle on how appraisal waivers work.