How to Waive an Appraisal Contingency

Real estate transactions often include contingencies that allow parties to back out without penalty under specific circumstances, such as securing financing or a satisfactory home inspection. In today’s dynamic housing markets, buyers sometimes modify or waive certain contingencies to make their offers more competitive. This approach is particularly relevant for the appraisal contingency, which relates to a property’s valuation and a buyer’s financing.

Understanding the Appraisal Contingency

An appraisal contingency is a standard clause in a real estate purchase agreement that protects the buyer’s financial interests. It ensures that if the property’s appraised value comes in lower than the agreed-upon purchase price, the buyer has options. Lenders typically base the maximum loan amount on the appraised value, not the purchase price, to mitigate their risk.

The contingency allows the buyer to renegotiate the purchase price with the seller to align with the lower appraisal. Alternatively, if renegotiation is unsuccessful, the buyer can withdraw from the contract without losing their earnest money deposit. A low appraisal can create a significant financial gap that the buyer may be unable or unwilling to cover. Without this contingency, a buyer could be obligated to purchase a property for more than its appraised value or risk forfeiting their earnest money.

Methods for Waiving the Contingency

Waiving an appraisal contingency involves a buyer explicitly agreeing to remove this protection from their offer. This is typically achieved by including specific language in the initial purchase agreement or through a subsequent addendum. A full waiver means the buyer commits to proceeding with the purchase regardless of the appraised value, accepting the risk of a low appraisal. This strategy can make an offer more attractive to sellers, especially in competitive bidding situations.

A partial waiver is another approach, where a buyer agrees to cover a specific amount of an appraisal gap. For instance, a buyer might state they will pay up to $10,000 over the appraised value if it comes in low. This provides some protection while still demonstrating flexibility to the seller. Consulting with a real estate agent is important to draft the appropriate language for such waivers or addendums, ensuring clarity and legal enforceability. Seeking advice from legal counsel before signing any waiver can help a buyer understand the full implications and proper documentation requirements.

Financial Considerations When Waiving

Waiving an appraisal contingency carries substantial financial implications for the buyer, especially if the property appraises for less than the agreed-upon purchase price. If an appraisal comes in low, the buyer becomes responsible for making up the difference between the appraised value and the purchase price out-of-pocket. For example, if a home is under contract for $500,000 but appraises at $480,000, the buyer would need to bring an additional $20,000 to closing that the lender will not finance. This sum is in addition to the standard down payment and closing costs.

A lender will typically only finance a percentage of the appraised value or the purchase price, whichever is lower. If the buyer cannot, or chooses not to, cover the appraisal gap, they may be forced to back out of the transaction. Having fully waived the appraisal contingency means the buyer would likely forfeit their earnest money deposit, which can be a significant sum, often ranging from 1% to 5% of the purchase price.

The increased out-of-pocket requirement can also affect a buyer’s overall liquidity and ability to cover other moving or homeownership expenses. Buyers must carefully assess their available cash reserves beyond the planned down payment and closing costs before considering a waiver. A low appraisal could lead to a situation where the buyer has insufficient funds to close the transaction, leading to the loss of their earnest money and potential legal repercussions for breach of contract.

Strategies Beyond a Full Waiver

Buyers seeking to make their offer more attractive without taking on the full risk of a complete waiver can explore alternative strategies. One common approach is an “appraisal gap guarantee,” where the buyer commits to covering a specific dollar amount of any appraisal deficit. For instance, a buyer might agree to pay up to $15,000 over the appraised value if the appraisal comes in low. This strategy provides the seller with assurance that a minor appraisal shortfall will not derail the deal.

Another option is a “limited appraisal contingency,” which ties the contingency to a specific minimum appraised value. Under this arrangement, the buyer agrees to proceed with the purchase as long as the appraisal meets or exceeds a predetermined value, such as $490,000 on a $500,000 offer. If the appraisal falls below this agreed-upon threshold, the buyer retains the right to renegotiate or withdraw without penalty. These strategies offer a middle ground, balancing the desire for a competitive offer with financial protection. While these options reduce some risk, buyers still need sufficient liquid funds available to cover any potential appraisal gap they commit to.