Sunday, October 2, 2022
Bringing the Latest in News Straight to Your Screen

Three Ways To Negotiate When Waiving Your Appraisal Contingency

By News Creatives Authors , in Real Estate , at October 25, 2021

A National Association of Realtors “30 Under 30” agent, serving the Del Mar/San Diego luxury residential market with Anderson Coastal Group.

Over the past year and a half, I’ve seen unprecedented market activity that has led to buyers taking more and more risks to stay competitive when making an offer on a home. Waiving the appraisal contingency is one of them. 

An appraisal calculates your home’s value and is a tool very important to lenders and home buyers alike. The appraised value of the home is the maximum amount that the lender can finance, and if it comes back lower than the purchase price — also known as a shortfall — the buyer has one of three options. They can pay the difference between the appraised value and the purchase price, negotiate a price reduction with the seller or walk away from the deal. 

But if you waived your appraisal contingency when making the offer, you’re at risk of losing your initial deposit if you cancel the transaction due to an appraisal shortfall. That doesn’t mean you shouldn’t consider waiving this contingency; it’s a great strategy to make your offer stand out and several of my California clients have used it in recent months. But there are steps you can and should take to protect yourself. 

Include a price cap in the purchase agreement.

If an appraisal comes back less than the contract price, our market typically sees a 5-10% discrepancy. But there are the rare occasions when it could be more, and you may not have the cash to cover the difference. By including a cap in your offer, your offer still has the attractiveness of a waived appraisal contingency without you getting into a financial situation you aren’t prepared to address. 

For example, if you offer $2 million for a Southern California beach home, but you are concerned about it not appraising, you can include language to the effect of “Buyer agrees to pay up to $50,000 over the appraised value. If the appraised value comes back at less than $1,950,000, then the buyer can cancel the transaction and receive their deposit back.” That way, you are off the hook for anything over $50,000 and secure in the fact that you won’t have to pay for anything more.

Show more money up front.

When you make a sizable down payment, you’re creating a strong foundation even if your appraisal doesn’t come back at value. That’s because a large down payment means the lender has a much lower loan to finance. Then if the appraisal does come in low, you already have enough cash involved in the deal to move your loan forward without skipping a beat. This also makes your offer more attractive to the seller.

All cash offers are even easier when it comes to appraisals because you don’t have a lender involved. It’s still smart to order an appraisal — it typically costs less than $1,000 in California — for your records and to confirm you are making a smart investment, but you don’t have to worry about the sale hinging on that one report. 

Secure a second appraisal.

This isn’t always necessary, but you can ask for your lender to order a second appraisal if the first comes in lower than expected. While appraisers are neutral third parties and have a systematized approach, it’s possible the second might come in at a higher value. If it does, you can use this as a way to start a negotiation with the seller. Maybe you agree to split the difference between the two appraisals, or better yet, the seller may agree to lower the price to the appraised value. Remember, the seller wants the appraisal to come through at value as well so they can progress their home sale, so more often than not, they are open to negotiation. A seller can even offer to pay for the second appraisal if they believe their home is worth more. 

Keep in mind though that the second appraisal could come back at the same value or even lower. You’ll want to confirm with your lender that the second appraisal can be used in place of the first. Some are more stringent than others on their requirements.

While real estate is a rather formulaic and transactional process, there are still ways — like removing your appraisal contingency — to get creative and win the home of your dreams. A strong agent will be able to guide you according to your own personal risk tolerance and financial situation and set you up for success.

Forbes Business Council is the foremost growth and networking organization for business owners and leaders. Do I qualify?


Leave a Reply

Your email address will not be published.