In todays competitive market, a lot of buyers are getting desperate in their offers.
We’re seeing many people shortening their inspections, waiving the appraisal contingency, making their earnest money go hard and all kinds of things.
Today, lets talk about the Appraisal contingency though….
First of all, many people are under the impression that when they waive the appraisal contingency, they’re actually waiving the appraisal. That’s not true. The appraisal isn’t for you, it’s for the lender, to ensure value to the asset that they are lending on. Only the lender can waive the need for the appraisal.
By waiving the appraisal contingency, you are simply putting your earnest money where your mouth is and promising not to cancel and get that earnest deposit back, just because the value comes in below your agreed price.
Be careful in this situation, as you may find that an appraisal can come in 5k low…. but it could also come in $20k low… you need to be cautious when writing in a term like this, so that you cover all aspects.
But here’s the catch that people are having issue with currently.
Only a conventional buyer (obtaining a conventional loan) actually has the legal right to waive this contingency.
That’s right… if the buyer is getting an FHA or VA loan product, they are federally restricted from losing their earnest money if they cancel due to that low appraisal!
So, what does this mean for the seller?
When reviewing multiple offers, you should be aware that offers waiving the appraisal contingency, may not have the legal right to do so. This doesn’t mean that the buyer isn’t allowed to make up the difference though… so if they are willing to waive that contingency, they should also state how much of a difference they are willing and able to make up.
Just keep in mind, that if they are FHA or VA, and they are willing to make up the difference, it doesn’t mean that they can’t cancel. Their right to cancel stays in place, if the appraisal comes in low.
What does this mean for the buyers?
Often times, a VA or FHA loan approval may not be as appealing of an offer as a conventional loan product. This is due partly because of certain restrictions, such as the FHA/VA Amendatory clause, stating that these buyers CANNOT lose their earnest money if the home does not appraise for at least the purchase price. Amongst other reasons, such as the lower qualification levels, and the inspection aspect of these appraisals.
In order to help your offer stand out, you should consider making your offer as strong as possible in other ways. If you are able to come in with cash over the appraised value, you can show that you have sufficient funds for this overage, with a “Proof of funds” letter from your bank. You may not be able to waive the contingency, but you can show the seller that there is no need to waive it, if you’re truly qualified and determined to close on the home.