Removing Appraisal Contingencies

Here’s what you should know about offers with no appraisal contingencies.


Today I want to talk about offers coming in above list price and without appraisal contingencies. If you don’t work in the real estate industry, you might not know what an appraisal contingency is. 


With most loan programs, buyers will have to get an appraisal of the home they intend to buy. An appraisal is an appraiser’s opinion of a property’s value. Keep in mind, this is just an opinion—not a fact—and it’s an opinion that can be contested if you don’t agree with it. That said, appraisers are licensed individuals who have years of training and apprenticeships under their belts that allow them to develop a credible opinion of what any particular property would resell for in the event that the lender has to deal with a default. As far as appraisers are concerned, they put a lot of weight into that value.


For example, if a home got listed at $250,000 in this market and it got multiple offers, it would usually sell for anywhere from $275,000 to $280,000, maybe more. The reality, though, is that the appraiser doesn’t have comparable sales to look at to justify that high sale price. This means the only way that deal will get across the finish line is with a buyer who’s willing to make up the difference with their own funds. 

“Sellers who price at the market and let it do the heavy lifting by driving their price up through multiple-offer competition are winning.”


Let’s say that home goes under contract for, $275,000 but all the recent comparable sales the appraiser looks at indicate a value between $250,000 and $260,000. Even if the appraiser is feeling aggressive and values the home at $260,000, that still leaves a $15,000 gap between their value and contract price. If the buyer doesn’t have the means to make up the difference plus pay their down payment, they won’t be able to get approved for their loan and the seller will have to renegotiate the deal. 


So whether you’re a seller reviewing multiple offers or a buyer making an offer and waiving your appraisal contingency, it’s important to understand that the lender will base the down payment percentage off of the lower sale price or appraised value. In the example above, even if the buyer has a VA loan with 0% down, they still have to come up with $15,000, and if they waive the appraisal contingency, there’s a real chance they’ll lose their earnest money if they have to cancel the contract. 


So if you’re a buyer, understand the offers you’re making and the waivers you’re putting in place. If you’re a seller, whether your buyer is using an FHA, VA, or conventional loan, you need to make sure they have proof of funds in case the appraiser’s comparable sales are $10,000 to $20,000 below the price you’re accepting. Your buyer needs to have the financial means to uphold their contract if there’s an appraisal shortfall. If they don’t, their offer may not be the best one. If the appraisal comes in short, they’ll just want to renegotiate, and they won’t have the ability to close. Another offer may be $5,000 (or more) below their offer, but if the buyer behind that offer can cover an appraisal shortage, that may be the offer for you. 


If you’re a seller, it’s also important to let the market dictate your home’s price. If you try pricing ahead of the market, odds are you’ll get no offers. This is something we’re seeing more and more in this market. Sellers who price ahead of the market are being punished. Sellers who price at the market and let it do the heavy lifting by driving their price up through multiple-offer competition are winning. As always, pricing your home at a price that will cause it to sell—not the price you think it will sell at—is the winning strategy. 


If you have questions about today’s topic or there’s anything else I can assist you with, don’t hesitate to reach out to me. I’d love to hear from you.