All About Appraisals
In a bidding war fueled market it is not uncommon for sellers to ask buyers to waive appraisal or at least waive the appraisal gap. While this may have seemed unheard of back in the day, it is now a tool listing agents use to determine “true” offers.
What is an Appraisal?
When a buyer purchases a home with a mortgage, they are taking out a loan with a financial institution. At closing it is that financial institution who actually purchases the property with the qualified buyer agreeing to reimburse them in scheduled payments until the loan and the agreed upon interest is fully paid off. Only when the last mortgage payment is made does the buyer truly own the house. If the buyer defaults on the loan, the bank will foreclose on the property and take it back.
Since the bank is the entity actually purchasing the property, they want to ensure that the house is worth what they are paying for it. To do this they send an appraiser to the property who will independently assess the property’s value.
What Happens if a Property Doesn’t Appraise?
If the property appraisal comes back at or above the contract price, the bank gives the loan. If it comes back below the contract price (we say the property “didn’t appraise”) a few things can happen, usually in this order.
1. Appeal- An appraisal appeal can be made using comps as supporting evidence in an attempt to sway the appraiser. Ultimately it is up to the appraiser to adjust their findings.
2. Re-appraisal- A second appraiser is hired to give their opinion of the property’s value. If they believe the home is worth the contract price or more the second appraisal report can be used instead of the first.
3. Negotiation- The buyer can ask the seller to lower the purchase amount to the appraised value or some amount between the appraised value and purchase price.
4. Termination- If the buyer cannot/will not make up the difference between the appraisal price and contract price and the seller will not agree to a lower sale price, the contract can be terminated.
Why Are Buyers Waiving Appraisal/Appraisal Gaps
We have all heard that “cash is king” which can seem confusing since in a real estate transaction the seller leaves the closing table with the full purchase amount regardless of if the buyer is using a mortgage or not. However, one of the reasons cash is so powerful is that it doesn’t require an appraisal. Unless otherwise specified by the attorneys, cash buyers can guarantee to pay the amount they are offering without needing approval from a third party. In order to be competitive in bidding wars, buyers using a loan started to waive the appraisal/appraisal gap to show they were serious about the amount they were offering.
Why Are Sellers Requiring Waiving Appraisal/Appraisal Gaps
As bidding wars got out of control with people commonly offering $25k -$50k above asking on $500k homes, listing agents started to question their offers. Some buyers were coming in with ridiculously high offers but if the the home didn’t appraise their offer may ultimately leave the seller with less money than a lower offer that was either cash or waived the appraisal/appraisal gap. An offer without an appraisal/appraisal gap waiver is not guaranteed, it is a gamble. In fact, some agents (myself included) will even say those offers “are not real” because they are not supported by any promise of money. Sometimes sellers decide to test the offer, however if the property doesn’t appraise, they either have to reduce the contract price or kill the deal. In some cases, even if they kill the deal and relist, they can wind up getting less for their home than the next “real” offer they originally received.
Proof of Funds Required
For a while in 2020 appraisals were virtual and it was almost unheard of for a property not to appraise. With prices quickly climbing very little had trouble getting the bank’s stamp of approval in 2021, but that started to change as rates increased and sales nation wide slowed down. There were even situations where buyers agreed to waive appraisal/appraisal gap and then didn’t have the money to do so. Some of these deals resulted in lawsuits, tarnished reputations, and error and omission claims (real estate malpractice insurance). Listing agents began doing what they should have all along, requiring proof of funds for the appraisal/ appraisal gap waiver.
Difference Between Waiving Appraisal & Waiving Appraisal Gap
When a buyer offers to waive appraisal/appraisal gap they are agreeing to purchase the property at the contract price even if the appraiser says the property is worth less. However, there is a difference between the two.
Waiving Appraisal
If a house is listed for $500,000 and a buyer agrees to waive appraisal
Property Appraises at or above asking- Buyer does not have to make up any difference
Asking = $500,000, Offer = $550,000
Appraisal = $550,000/ $550,000+
Buyer Responsibility = $0
Property appraises between asking - Buyer has to make up the difference between appraised value and the amount offered
Asking = $500,000, Offer = $550,000
Appraisal = $525,000
Buyer Responsibility = $25,000 ($550,000 - $525,000)
Property appraises below asking- Buyer has to make up the difference between appraised value and the amount offered
Asking = $500,000, Offer = $550,000
Appraisal = $490,000
Buyer Responsibility = $60,000 ($550,000 - $490,000)
Waiving Appraisal Gap
If a house is listed for $500,000 and a buyer agrees to waive the appraisal gap, the buyer is only resposniable for the stated amount. So if they are offering $50k above asking and waive the full gap between appraisal and contract price ($50k) even if the apprasial comes in below asking price, they only responsible to pay the stated amount, in this case $50k.
Property Appraises at or above asking- Buyer does not have to make up any difference
Asking = $500,000, Offer = $550,000
Appraisal = $550,000/ $550,000+
Buyer Responsibility = $0
Property appraises between asking - Buyer has to make up the difference between appraised value and asking amount
Asking = $500,000, Offer = $550,000
Appraisal = $525,000
Buyer Responsibility = $25,000 ($550,000 - $525,000)
Property appraises below asking- Buyer has to make up the difference between appraised value and asking amount
Asking = $500,000, Offer = $550,000
Appraisal = $490,000
Buyer Responsibility = $50,000 ($550,000 - $490,000= $60k/ Max out at $50k)