Waive Goodbye to Money?

Jane Gray
Published on May 5, 2017

Waive Goodbye to Money?

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Here’s 3 statistics that provide meaning to a hot market.  Take a look at the graph to see how these stats compare:

  1. Homes going into Contract (aka Pending Sales) in March of this year were 50% higher than the homes available for sale.
  2. For Sale properties in March 2017 were 25% down from March of 2016.
  3. 5% more homes went into Contract in March of this year than this time last year.

 

Note:  The data above is for Single Family Homes under $500k in the tri-county area.

Okay, so what does it all mean?  It means that buyers are out in force.  More homes in contract with less inventory means that we’re suffering through multiple offers.  Even for Seller’s agents, getting 18 offers and a phone blowing up with questions is a nightmare.  In March, we dipped below one month of inventory.  Bottom line:  there weren’t enough homes to go around!

So when people are competing, price isn’t the only thing that is used as a lever to sway the scales in favor of a particular offer, there are the financing terms (Cash, Conventional, FHA, VA, etc.), there’s a matter of whose going to cover which closing costs, there’s contingency deadline dates such as the inspection, appraisal, and loan contingencies.  Then there’s waiving of contingencies.

I want to talk about the risk of waiving the appraisal contingency for a moment.  The reason that this even comes into play is that with 18 impassioned offers on a single property, the price is driven up possibly beyond what the home would appraise at.

So let’s back up and talk about the purpose of Appraisal Contingency and the appraisal, for that matter.  An appraisal is an unbiased estimate of the true (or fair market) value of what a home is worth.  A lending institution uses appraisals to objectively determine if a home that it is financed has a resale value greater than or equal to what they believe it’s worth so that if the borrower can’t pay for whatever reason, they have the ability to sell it to recoup their cost.  Lenders have become more strict about this requirement after the last crisis where they were holding homes that were only a fraction of what they had on their books to recover.  Appraisals aren’t only for those financing a home.  Someone paying cash may also want to ensure that they aren’t paying over the fair market value.

The appraisal contingency in a purchase contract provides the buyer the ability to get out of the contract and get their earnest money deposit back if the appraised value comes in lower than the offer price and the buyer doesn’t want to or have the ability to make up the difference.  It also provides an opportunity for buyer and seller to renegotiate price if the appraised value is lower than the offer price. 

In a very competitive market, to be competitive, many folks are asked to waive their Appraisal Contingency.

Should you WAIVE the Appraisal Contingency?  First off, this is a risky move.  Ask yourself the following:

  1. Do you have cash to pay the difference between a lower appraised value and the offer price?
  2. Are you willing to lose your Earnest Money Deposit if you make a gamble and the appraised value doesn’t come in at your offer price and you don’t want to make up the difference?
  3. Do you want to pay more than what the house is potentially worth?

These aren’t easy questions to answer!  They require some thought and counsel from a good agent and if financing, a good lender.  Don’t get backed into a corner!  Know the risks before you make that type of decision.  There are always more factors that may come into play  based on the house and even your personal financial situation.  I’m always happy to provide additional information and I have lenders that can also provide pros/cons as well.  Just ask.

Have a great weekend!

 

 

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Waive Goodbye to Money?
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