If you're in the Austin area, it's no secret that Austin is experiencing a heavy seller's market at the moment. This means that sellers have all the power and leverage, putting buyers in less than ideal situations.
When it's a heavy seller's market, one of the things that becomes par for the course is sellers requesting appraisal waivers from buyers.
But agreeing to an appraisal waiver is a big ask, so it's very important to understand what you're agreeing to. Let's get into it.
What's an Appraisal?
If you're financing your home, your lender will need to verify and gain comfort on two things: who they're lending money to (you!) and what they’re lending the money to you for (the house!). They want to know that you're a reliable borrower who will pay their mortgage. But they also want to make sure that, should you fail to pay your mortgage, that they can seize the house and sell it for enough money to make up their losses.
In order to verify that the house is worth at least what the purchase price is, they will send a licensed appraiser to the property. An appraiser is a third-party professional who will give their professional opinion of what they believe the house is worth. They’ll have access to the MLS listing, as well as the offer price.
Based on their assessment, they'll return a report with a number that indicates what they believe the home is worth. The lender uses this as their guide for how much money to lend to you for the subject property.
Without an appraisal waiver, here are the outcomes.
The Appraisal Comes in High
This is when the appraisal comes back higher than the purchase price. This means they believe that the home is worth more than you’re paying, so you got a good deal. You’re in the clear here!
The Appraisal Comes in at the Purchase Price
The appraiser thinks the home is worth exactly what you're paying for. You're also in the clear here!
The Appraisal Comes in Low
This is when the appraisal comes back lower than the purchase price. This is a problem because the lender will only lend on that lower appraisal amount instead of your purchase price.
If you’re a buyer, ideally the seller will agree to come down in purchase price to meet the appraisal number, but this never happens in this climate.
If you’re a seller, ideally the buyer will pay the difference between the purchase price and the appraisal price in cash. Or you can meet in the middle or at a negotiated price point.
But if none of those outcomes are possible, without an appraisal waiver, the buyer has the right to walk away from the transaction if the appraisal comes in low. This is when Section 2B of the Third Party Financing Addendum kicks in, which is about the property approval.
At this point, the lender would write a letter saying that they cannot issue the loan because it doesn’t meet underwriting requirements, as the appraisal came in below the purchase price. The buyer has up to 72 hours before closing to terminate the contract by giving the seller the letter from their lender, as well as a notice of termination. If the buyer does this, then they are entitled to their earnest money and are free to walk away.
Obviously, as a seller, you don't want this to happen. The appraisal will typically occur about two to three weeks after accepting an offer, so they would have wasted all that time only to start over. And the longer a home sits on the market, the more value it loses. But with an appraisal waiver, the seller remains protected from this happening because the buyer previously gave up their right to walk away from the contract in this scenario.
Okay, So What's an Appraisal Waiver?
An appraisal waiver says that the buyer cannot walk away, even if the appraisal comes in low. This may seem like a simple statement, but it can become complicated quickly.
Let's use an example with numbers to better explain this.
Say you found a house and you want to offer $500K for it, but the seller is requiring you to also sign a full appraisal waiver.
Because your offer is for $500K, you need the appraisal to come back at $500K or higher. But let's say that it unfortunately comes in at $480K, which is $20K less than your purchase price. As mentioned above, without an appraisal waiver, you'd be able to walk away with your earnest money. But you already signed something saying that you waived that right.
So what do you do about that $20K difference? Because the lender will only lend money based on the $480K value, you will need to make up that $20K difference in cash at closing.
This becomes an issue because many people can't casually fork up an additional $20K in cash, so it's extremely important to understand what you're getting into when you sign a full appraisal waiver. Sometimes the difference can be $200K+, which is an even bigger problem for most (if it's not for you, tell me your secrets!).
While an appraisal waiver makes an offer more appealing by making it more competitive with a cash offer in the seller's eyes, it can be risky and a tough pill to swallow.
If you know that you have a fixed amount of cash, a partial appraisal waiver is another option.
What's a Partial Appraisal Waiver?
A partial appraisal waiver essentially puts a "floor" on the amount at which you can walk away, should the appraisal come in low.
Let's go back to that $500K example from above. Let's say you have a fixed amount of liquid cash that you're comfortable spending, call it $50K. You want to put 5% down, which is $25K. So you have another $25K left in cash ($50K - $25K down payment = $25K).
This means that you should submit a partial appraisal waiver with a cutoff of $475K ($500K purchase price - $25K of the rest of your available cash = $475K).
So if the appraisal came in below $475K, you could walk away and get your earnest money back. But if the appraisal came in above $475K, you would be obligated to make up the difference in cash at closing.
Obviously this is less appealing to a seller compared to a full appraisal waiver, but it could be enough for a buyer to feel comfortable with their budget boundaries, while remaining a bit more competitive compared to not signing any appraisal waiver.
Full and partial waivers are extremely common in the Austin market right now. In order to win in a multiple offer situation, buyers need to be prepared to offer over the asking price, sign a full appraisal waiver, and offer high option money and earnest money amounts.
An appraisal waiver will give you a better shot of getting your offer accepted, but it's very important to understand what you're signing before the contract is executed.
If you have more questions about strategies and tools to make your offer more appealing to land your dream home, feel free to drop me a line.
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