What Does It Mean to Waive Appraisal Contingency?

Real estate transactions often involve various conditions designed to protect both buyers and sellers. These conditions, known as contingencies, establish specific requirements that must be satisfied for a purchase agreement to become legally binding. They act as safeguards, allowing parties to withdraw from a deal without penalty if certain circumstances are not met. Understanding these clauses is important for navigating property transactions.

Understanding the Appraisal Contingency

An appraisal contingency is a standard clause included in a real estate contract. Its primary purpose is to protect the buyer if the property’s appraised value is less than the agreed-upon purchase price. This safeguard ensures that a buyer does not overpay for a home based on its independent valuation.

When an appraisal contingency is in place, a licensed appraiser evaluates the property to determine its fair market value. If this appraised value comes in lower than the offer price, the buyer has several options: renegotiate the sale price, make up the difference in cash, or withdraw from the contract and receive their earnest money deposit back. This prevents the buyer from being obligated to purchase a home a lender deems less valuable than the agreed-upon price.

The Act of Waiving the Contingency

Waiving an appraisal contingency means the buyer removes this protective clause from the purchase agreement. By doing so, the buyer commits to proceeding with the purchase regardless of the property’s appraised value. This means even if the appraisal comes in lower than the agreed-upon price, the buyer will still complete the transaction.

This commitment means the buyer is responsible for covering any “appraisal gap” – the difference between the appraised value and the purchase price – out of their own funds. The buyer agrees to pay the full purchase price, even if a professional appraisal suggests the home is worth less. This decision removes financial protection, binding the buyer to the contracted price without recourse based on the appraisal outcome.

Motivations for Waiving

Buyers often choose to waive the appraisal contingency in competitive housing markets. In situations with multiple offers, removing contingencies can make an offer more attractive to sellers, who prefer fewer conditions for a smoother transaction. This strategy signals a buyer’s strong commitment and willingness to take on additional financial risk, potentially giving them an edge over other bidders.

Another motivation stems from a buyer’s strong financial position, such as having significant cash reserves. If a buyer has ample funds to cover a potential appraisal gap, waiving the contingency becomes less risky for them. This approach can also be appealing to cash buyers, as they are not reliant on a lender’s appraisal for financing approval.

Potential Financial Outcomes

If a buyer waives the appraisal contingency and the property appraises for less than the agreed-upon purchase price, there can be financial ramifications. Mortgage lenders base their loan amounts on the lower of the purchase price or the appraised value. This means if the appraisal is lower, the lender will only finance up to that reduced appraised value.

Consequently, the buyer becomes responsible for making up the difference, known as the “appraisal gap,” in cash. For example, if a home is offered at $400,000 but appraises at $380,000, the buyer must bring an additional $20,000 to closing. This additional out-of-pocket expense is separate from the down payment and closing costs.

Covering this gap increases the buyer’s total cash requirement at closing. Buyers may need to reduce their intended down payment to free up cash for the gap, potentially leading to private mortgage insurance if their equity falls below a certain threshold.

Prudent Preparations Before Waiving

Before deciding to waive an appraisal contingency, buyers should undertake several preparatory steps. Assess one’s financial capacity to cover a potential appraisal gap. This involves confirming access to liquid funds, such as savings or other investments, that can be used if an appraisal comes in low.

Consulting with a real estate agent and mortgage lender is also advised. These professionals can provide insights into local market conditions, help review comparable sales data to estimate a reasonable appraisal value, and discuss financing options should an appraisal gap arise. Understanding the specific terms of the purchase agreement and any potential consequences of waiving the contingency is also part of this preparation.