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Curious about the pros and cons of waiving an appraisal contingency?
We have been looking at homes for over a year and prices are only going up. We have written four offers on homes only to get beat out (once was even by a cash buyer). On the most recent offer, the seller’s Realtor® countered us to waive the appraisal contingency. Our offered price was higher than everyone else’s but it was contingent on the home appraising. Our offer was not selected. Now I am thinking that next time we should just write the offer without the appraisal contingency – we have 25% down payment. What are the pros and cons of waiving this appraisal contingency? Jenny
I am sorry that you are still writing offers. What is an appraisal contingency? Lenders base their loan amount on a percentage of the appraised value or purchase price, whichever is less. It’s an extremely strong seller’s market. There are many components of a strong offer other than price. When the price offered is contingent upon the home appraising – the buyer has an “out”. Most buyers write an offer with an appraisal contingency; meaning that if the home does not appraise for the full amount, the buyer can cancel escrow and have their deposit returned.
A home is listed for $1,000,000
The buyer submits an offer for $1,050,000; their 20% down payment is $210,000
Escrow is opened; unfortunately the home is appraised for just $1,000,000 – the bank will lend the buyer 80% (of the lower amount) or $800,000. In order to obtain financing the buyer needs to increase his down payment by $40,000. OR the seller needs to reduce the purchase price or the two parties can negotiate somewhere in the middle.
BUT when the buyer has waived their appraisal contingency the buyer must increase his down payment (in this example) by the $40,000 OR risk losing his escrow deposit. If you are a home buyer unsuccessfully making offers, waiving an appraisal contingency will increase your chance of success. Hopefully you are working with an experienced real estate agent who can analyze comparable homes that the appraiser will likely use (similar homes sold in the last six months within one mile). If your Realtor® thinks it’s likely the appraisal might come in low and increasing your down payment is difficult, you might consider making two loan applications – this will give you two different appraisals.