It is no secret that we are currently in a sellers market, which is making it extremely tough for home buyers trying to purchase a house. Low inventory and interest rates are spurring a competitive environment that is generating multiple offers on most properties, many over asking price. Given the fierce competition, buyers are feeling the pressure to not only offer more, but to also waive appraisal. The challenge is if a buyer agrees to waive appraisal, it can end up costing them additional cash. To better understand what it means to waive appraisal, we have put together some helpful information:

What is an appraisal?

First, it is important to understand what an appraisal is and how it can impact a negotiation. An appraisal is an unbiased opinion from a third-party professional that assesses the market value of a home. An appraiser will conduct a thorough inspection of the home’s interior and exterior taking into account lot size, square footage, upgrades, and other features. In the report, an appraiser must include a street map and photos of the home being appraised as well as the comparable properties being used, an explanation of how the square footage was calculated, a sketch of the exterior of the building, and any other information pertinent to the properties value such as public records or sales data.

Who is it for?

The appraisal process is in place to protect the lender as well as the buyer. An appraisal contingency is a part of the purchase contract and is usually the first step in closing escrow on a home. The appraisal helps the bank to protect itself to make sure a buyer is not overborrowing for a property. The home is the collateral in the case that a homeowner can not pay and defaults on the loan. In this case, the lender will sell the home to make up the money that has not been paid. The appraisal contingency allows the buyer to back out of the sale without breaching the contract, if the home is valued at less than the agreed selling price. Normally, when this scenario occurs there is a negotiation between the buyer and the seller to adjust the agreed upon sales price to more closely reflect the appraised value.

Why waive appraisal?

There are a few reasons a buyer may opt to waive appraisal. The first being that they are making a cash offer and will not be working with a lender that requires an appraisal. If a buyer is confident in their offer, does not want an appraisal on the property or is not concerned, it is not needed to proceed if there is no lender involved. Second, waiving the appraisal can strengthen a negotiation and make a buyer’s offer more competitive. The buyer is ultimately saying that they will buy the home even if they are required to pay more than what the property appraises for. The buyer accepts the financial burden that may come along with the home being valued at less than the agreed upon offer. The bank will only lend the qualifying amount based on the actual appraised value of the home. When a buyer waives an appraisal they are also contractually liable for the purchase and should they decide to back out, it can cost them their initial deposit. This is typically 1 to 3 percent of the sale price, and if a buyer walks, it can be a breach of the contract. A buyer must come out of pocket with the difference of the appraised value and the sales price, appeal to the seller to lower the price (unlikely in this market), restructure their financing to put down a lower percentage to free up cash for the higher sales price or breach the contract.

Our team at Landmark Title works closely with Realtors in the residential space in Arizona and Nevada. If you have a residential real estate transaction and need an expert in escrow or title services, contact us today.