Waiving the appraisal - what does that even mean?
Simply put: waiving the appraisal contingency means that you will make up for any appraisal shortfall in cash and move forward with the sale, regardless of what the bank says the home is worth.
In a fast moving market, appraisals don’t always keep up with the market. Why is this, you ask? Great q. When an appraiser looks at comps for a property, they are looking for similar, recently sold properties within so many miles with similar characteristics. Since it typically takes 3 months from accepted offer to closing day, appraised values are 3 months behind the market, which is very behind in this fast moving market where homes are only on the market for 5ish days before getting multiple offers and going for above asking.
Why is waiving the appraisal contingency valuable in your offer? Another great q. Waiving the appraisal makes your offer as good as cash. When it doesn’t matter what the bank says, that’s (kind of) one less cook in the kitchen trying to keep the sale together. Technically speaking, if your offer is 500k, and the appraisal comes in at 499k, you can walk away from the sale and get your deposit back. The seller will have to start over from square one, putting their home back on the market, and waiting another 3 months before closing.
What if I don’t want to/can’t waive the appraisal entirely? Consider an appraisal floor. This would be something like: our offer is 500k, and we will make up for an appraisal shortfall so long as the home appraises at 400k or above. You can sub in any numbers here that work for your maximum amount of cash down. While not as compelling as waiving the contingency entirely, this is an added assurance to the seller that you will make it to the closing table.
What if the appraisal comes in higher than my offer? Nothing! That’s amazing. The seller can’t ask for more just because the home appraised for more as you are already in contract for a certain sales price. Also, the seller will never see the appraisal report, it is only disclosed to you.
Something else to remember here is every home has 3 different values: the market value, the appraised value, and the assessed value. More on this later…
Here are 3 of the same scenarios at 3 different price points:
A $350k offer:
So, your current offer is $350,000 on a home listed for $329,000. Let’s say you waive the appraisal contingency entirely. This means if the bank’s appraiser says the property is worth $300k, with traditional 80% financing, the bank will give you $240k, and you would have to put down $110k + closing costs.
Another option in this above scenario is financing 90% of what the appraiser says it’s worth, so the bank gives you $270k, you pay a monthly PMI (probably $100/mo) fee until you get to 20% equity, and you have to put $80k down + closing costs.
This is where “buyer will put down up to x% or $x down” comes into play. You aren’t on the hook for all that cash if the bank will finance more than 80%. Most of my clients end up financing 90% after the appraisal report is complete even if they offer to put down more than 30-40% so they can hang onto their cash.
Waiving the appraisal entirely does mean that you are on the hook regardless of where the appraisal comes in, which is why this is as good as offering all cash. I wouldn’t waive the appraisal contingency entirely unless you have 50% of your offer in cash just to be super, super safe.
Another scenario:
You offer to $350k with a 50% financing contingency. This is a similar scenario with different wording. So long as the bank will give you $175k, you will move forward with the sale and make up that other $175k. If the bank appraises the property at $350k and you use 80% financing, you’d only be putting down $70k.
One more:
Your offer is $350k and you agree to make up for an appraisal shortfall so long as the home appraises at $320k+. Worst case scenario, appraisal is $320k and you finance 80% which means you put down $64k. You could also finance 90% here to keep a little more cash.
If the appraisal comes back at $319k you could renegotiate the sales price down $1k, or walk away entirely. This is why for sellers this contingency is the highest risk.
A $675k offer:
So, your current offer is $675,000 on a home listed for $625,000. Let’s say you waive the appraisal contingency entirely. This means if the bank’s appraiser says the property is worth $575k, with traditional 80% financing, the bank will give you $460k, and you would have to put down $215k + closing costs.
Another option in this above scenario is financing 90% of what the appraiser says it’s worth, so the bank gives you $517.5k, you pay a monthly PMI (probably $100/mo) fee until you get to 20% equity, and you have to put $157.5k down + closing costs.
This is where “buyer will put down up to x% or $x down” comes into play. You aren’t on the hook for all that cash if the bank will finance more than 80%. Most of my clients end up financing 90% after the appraisal report is complete even if they offer to put down more than 30-40% so they can hang onto their cash.
Waiving the appraisal entirely does mean that you are on the hook regardless of where the appraisal comes in, which is why this is as good as offering all cash. I wouldn’t waive the appraisal contingency entirely unless you have 50% of your offer in cash just to be super, super safe.
Another scenario:
You offer to $675k with a 50% financing contingency. This is a similar scenario with different wording. So long as the bank will give you $337.5k, you will move forward with the sale and make up that other $337.5k. If the bank appraises the property at $600k and you use 80% financing, you’d only be putting down $195k.
One more:
Your offer is $675k and you agree to make up for an appraisal shortfall so long as the home appraises at $590k+. Worst case scenario, appraisal is $590k and you finance 80% which means you put down $203k. You could also finance 90% here to keep a little more cash.
If the appraisal comes back at $589k you could renegotiate the sales price down $1k, or walk away entirely. This is why for sellers this contingency is the highest risk.
A $1m offer:
So, your current offer is $1,000,000 on a home listed for $900,000. Let’s say you waive the appraisal contingency entirely. This means if the bank’s appraiser says the property is worth $800k, with traditional 80% financing, the bank will give you $640k, and you would have to put down $360k + closing costs.
Another option in this above scenario is financing 90% of what the appraiser says it’s worth, so the bank gives you $720k, you pay a monthly PMI (probably $100/mo) fee until you get to 20% equity, and you have to put $280k down + closing costs.
This is where “buyer will put down up to x% or $x down” comes into play. You aren’t on the hook for all that cash if the bank will finance more than 80%. Most of my clients end up financing 90% after the appraisal report is complete even if they offer to put down more than 30-40% so they can hang onto their cash.
Waiving the appraisal entirely does mean that you are on the hook regardless of where the appraisal comes in, which is why this is as good as offering all cash. I wouldn’t waive the appraisal contingency entirely unless you have 50% of your offer in cash just to be super, super safe.
Another scenario:
You offer to $1m with a 50% financing contingency. This is a similar scenario with different wording. So long as the bank will give you $500k, you will move forward with the sale and make up that other $500k. If the bank appraises the property at $925k and you use 80% financing, you’d only be putting down $260k.
One more:
Your offer is $1m and you agree to make up for an appraisal shortfall so long as the home appraises at $900k+. Worst case scenario, appraisal is $900k and you finance 80% which means you put down $280k. You could also finance 90% here to keep a little more cash.
If the appraisal comes back at $899k you could renegotiate the sales price down $1k, or walk away entirely. This is why for sellers this contingency is the highest risk.
All of this is to say,
Waiving the appraisal contingency, or agreeing to an appraisal floor, can be an extremely valuable and competitive part of your offer. I hope these scenarios are helpful in understanding the appraisal contingency overall, and how you can wield it (or lack thereof) to make your offer the most appealing to a seller.
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