What does it mean to “waive the appraisal contingency?”

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In the last few years, it has become more common for competitive offers to include an appraisal waiver by many buyers. It is important to understand this concept and seriously consider if it is a risk that is worth the reward and also if it is one you feel financially prepared to take on should the home not appraise at the agreed upon sale price. 

What does it mean to “waive the appraisal contingency?”

When a listing agent begins to receive multiple offers, it’s pretty typical for the price to start escalating 5%, 10%--sometimes even more--over asking price. But, if you, the buyer, escalate the price, what will you do if the home doesn’t appraise for the agreed upon sale price? After all, if the purchase is financed, the lender is going to require an appraisal and they will only lend up to the appraised value.

If you have an appraisal contingency in place, you may not be terribly concerned as the buyer. That appraisal contingency, if left intact, protects you from being responsible for purchasing the home for more than the appraised value. But the seller is very worried. Sellers want to know that the buyer can or will cover the value difference if the appraisal comes in lower than the offer price; the last thing a seller wants is a terminated sale agreement due to a low appraisal. If a buyer can’t waive an appraisal completely but they have additional funds, some buyers will write a clause in the sale contract stating that they will contribute a specific amount of cash to cover a gap between the agree upon sale price (what you bid) and the appraised value (what the appraiser says its worth). 

Why is this term so favorable to a seller?

Waiving the appraisal contingency often can give the sellers a bit of confidence that the deal will close and that they won’t have to pay for an unexpected price discrepancy. Buyers who can’t cover the difference between the offer price and the appraised value should know that sellers may have an incentive to consider a lower offer price with some combination of a larger down payment and appraisal waivers because it may seem more like a “sure thing” to close at the price offered. This is also why a cash offer at the same or even a slightly lower price than a financed offer is so valuable to a seller—cash offers do not have to appraise. If you are financing your home purchase, as most folks are, consider how much you might be willing to contribute towards covering an appraisal gap if the home doesn’t come in at the value that you offered. A term like that can make you more competitive against cash offers while still preventing you from covering an unknown amount. 

How about some examples?

Let’s say you, the buyer, bid $495,000 for a home. When the appraisal is complete, the third party appraiser determines the value to be $485,000. If the appraisal contingency has been waived, you are responsible for closing that gap with cash at the time of close along with your down payment. The upside is that your mortgage and down payment are now calculated against the new loan amount. (485,000 / 20% = 97,000 + 10,000 to cover gap due at close vs. 495,000 / 20% = 99,000 due at close. The difference is actually $8,000 once you recalculate the down payment and your monthly payment will be lower as well.)

Let’s say you, the buyer, bid $495,000 for a home. When the appraisal is complete, the third party appraiser determines the value to be $485,000. If the appraisal contingency is in place, one of a few things will likely happen:

  • You will negotiate the price down to $485,000 and the sale moves forward

  • You pay the difference and the sale moves forward

  • The sale is terminated and you receive your earnest money back

  • Talk to your agent about contesting the appraisal

It’s also not an ALL OR NOTHING option. Some buyers are more comfortable saying that they will waive the appraisal contingency–UP TO BUT NOT EXCEEDING a certain amount. This helps insulate the buyer from catastrophic risks. For example, if a home came in $60,000 under value and the buyer only agreed to cover a $20,000 gap. 

It should be said that in the current market, the most common scenario that we actually see is that the home does appraise, the loan is funded, and the buyer does not bring any additional funds to close. However, this can change as the market ebbs and flows and it definitely depends on the specific home in question. However, you should always be prepared for a worst case scenario.

Moving forward

Consider early on if you have the financial reserves to use this term for your competitive advantage and if it suits your comfort level. That way, when you find a great home, you feel like your decision to waive or not to waive this contingency has been carefully considered. Remember, it is just one tool in your toolbox on the road to creating a competitive offer.