Throughout 2021, as home buyer demand surged and the number of homes for sale plummeted, bidding wars and multiple offers became the norm. Homes began selling for substantially more than the asking price and appraisals were unable to keep up with the rapidly escalating values.

As a result, a seldom-used form in years past suddenly became expected with every offer above the asking price - the appraisal waiver. While most home buyers have heard of appraisal waivers by this point, not all know exactly what it is or how it impacts them when buying a home.

To learn more about how an appraisal waiver is used, and how it impacts you when buying a home, watch the following video or continue reading below;

An appraisal is part of every financed real estate transaction and is an independent assessment of a property’s value. The appraised value, not the contract price, is what the bank uses to determine how much money it will loan against a given property. In most cases, assuming normal market conditions, the appraisal usually comes in fairly close to the contract price.

As an example, let’s assume you will be buying a home using a conventional loan with a 20% down payment. To keep the math simple, we will say the home you are interested in is listed for $500,000 and you will be making a full-price offer.

That scenario would look like this:

This one is fairly straightforward. If the purchase price is $500,000, and the appraisal comes in at $500,000, your down payment of 20% would be $100,000 and the 80% loan from the bank would be in the amount of $400,000.

If, by chance, the appraisal was to come in lower than the contract price, in a normal market without multiple offers the buyer and seller would typically negotiate a resolution.

As you know, the market we are in currently is nowhere near normal. With there being more buyers than there are homes for sale the seller is unlikely to negotiate with you on anything. If you choose not to move forward the seller will just say “next” because there are 10 or more buyers standing in line right behind you.

Multiple Offers and Bidding Wars

The chances of being able to buy a home below, or at list price, just doesn’t exist in today’s ultra-competitive market (unless the home has been listed way too high to begin with).

It’s not that the seller is unwilling to sell the home for the list price, but you are competing against other buyers who are willing to pay more. How much more is going to vary from buyer to buyer and how much a given home is worth to them.

The challenge with bidding wars is the price is often pushed up beyond what can be justified by the appraiser. While the appraiser does take market conditions into consideration, they still need a minimum of 3 recently sold properties to use as comparable sales. Homes have been selling so fast that appraised values haven’t had time to catch up with market values (the price a buyer is willing to pay).

Knowing the home is unlikely to appraise for the contract price, buyers are having to use appraisal waivers in order to be competitive. The appraisal waiver is the buyer’s way of telling the seller they are guaranteeing the contract price regardless of where the appraised value comes in. I’m sure you can see how this could potentially cause some problems and uncertainty for a buyer.

Let’s go back to our example from above of a property listed for sale at $500,000. In this example, we will assume multiple offers are being submitted and you have submitted a winning bid of $550,000 and included an appraisal waiver. When the appraisal is done the appraised value comes in at $525,000;

Remember, the bank base loan calculations off of the appraised value not the contract price. In this example, since the appraisal came in at $525,000, you will be responsible for covering any shortfall between the appraised value and contract price.

In this case, you would need to bring $25,000 plus the down payment to closing so the total cash required would be $130,000 plus closing costs, which are lender, title, and escrow fees. As you can see, since you don’t know where the appraisal is going to come in it can be difficult to estimate how much total cash you will need on hand to close the transaction.

Your lender will also require that you have a certain amount of cash in reserve at closing for those unexpected life events that occur.

Bottom Line

Appraisal waivers don’t look as though they will be going away any time soon as market conditions are expected to remain tight in 2022, although it is widely believed that the pace of home price appreciation will slow to more normal levels.

It’s important that you talk with your agent and lender to work out all of your finances prior to writing offers. Your agent should be able to help you gauge where the appraisal on a given property is likely to come in while your lender will help you understand exactly how far above a given list price you can go while still making sure that your finances remain with the loan guidelines.

Want to know how hot the market is in your area of interest? At the top of my Frisco Market Report, you can search the current market conditions of any zip code or city in the country.

Have additional questions? Feel free to Schedule a Call and I’d be happy to discuss your specific situation in more detail