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Appraisal Contingency

dursty87
Established Contributor

Appraisal Contingency

Is an appraisal contingency a bad thing?  From what I have seen/read it is a good thing or am I completely mistaken?

I have been looking for a house for a few weeks now and made my very first offer!  I talked to my RE agent about the appraisal contingency and he tried talking me out of it.  I made it clear that I am not worried about  say $5k but I am worried about $10k+.  The property in question had multiple offers so I submitted my offer $5 over list and had the contingency in place for $1k below list.  So I am willing to come out of pocket with an extra $6k because I absolutely love the house but anymore than that would be a deal killer.  Is this not a smart move on my part?  Any and all advice would be greatly appreciated.  This is my first time buying so I am not sure if I am going about it the right way.

Thanks!

Message 1 of 26
25 REPLIES 25
Revelate
Moderator Emeritus

Re: Appraisal Contingency

Maybe someone smarter than I as a buyer could see it; however, I'd never give up my ability to walk away if the appraisal came low and I couldn't make the difference out of my financial reserves and the seller refused to negotiate the price.

 

At a minimum earnest money, smoked.  I don't know the full legal ramifications though I expect that'd be about it if the borrower couldn't make the loan work in that scenario.

 

This is such a standard contingency I can't see ever waiving it.




        
Message 2 of 26
dursty87
Established Contributor

Re: Appraisal Contingency


@Revelate wrote:

Maybe someone smarter than I as a buyer could see it; however, I'd never give up my ability to walk away if the appraisal came low and I couldn't make the difference out of my financial reserves and the seller refused to negotiate the price.

 

At a minimum earnest money, smoked.  I don't know the full legal ramifications though I expect that'd be about it if the borrower couldn't make the loan work in that scenario.

 

This is such a standard contingency I can't see ever waiving it.


Thanks Rev, I appreciate your response.  I feel the exact same way.  Do I want to throw away earnest money?  Nope.  Do I want to come up with xxxx amount of $$ if the seller isn't willing to negotiate.  Nope.

But my agent literally text me "If the offer is not accepted, moving forward I would highly discourage an appraisal contingency as it weakens the deal".  He mentioned comps and what not which is fine but I really don't think buying a house more than it is worth is a smart move(to a certain extent I guess)  It really rubbed me the wrong way and before I start looking for another agent I thought I would ask for advice/opinions here.  

Message 3 of 26
elliott_bay_sunset
Established Member

Re: Appraisal Contingency

It really depends on your market. In my area, houses are going for 100k+ over list in bidding wars, and you don't have a chance if you include an appraisal contingency. That said, we aren't willing to buy a house for less than what it's worth either, which is why we are looking just outside of the city where houses are going for closer to list.

Message 4 of 26
StartingOver10
Moderator Emerita

Re: Appraisal Contingency


@elliott_bay_sunset wrote:

It really depends on your market. In my area, houses are going for 100k+ over list in bidding wars, and you don't have a chance if you include an appraisal contingency. That said, we aren't willing to buy a house for less than what it's worth either, which is why we are looking just outside of the city where houses are going for closer to list.


Yes, this is the critical point - the market at the time you are buying.

 

It is prudent to have an appraisal contingency for the buyer.  If you are in a rapidly rising market then you are virtually guaranteed that the appraisal will fall short of the contract price because there is a lag time by 30 to 60 days from those properties that go under contract until closing. Only closed sales are used to generate the value. Sometimes the appraiser augments with a pending or active sale, but uses the values from the closed comps.

 

OP, your solution of allowing $X to cap your potential out of pocket extra down payment is an excellent one. We use that here in our market because if we didn't the FHA/VA and other high LTV buyers would be locked out of purchasing in many neighborhoods now as the market is rapidly rising. It is smart to contain your extra funds so you are working with a known amount.

 

I am the seller's agent on a property in the same situation as you describe - property put on the market and we received 7 offers in two days- had to go with the one that was willing to pay the difference between appraised value and contract price after narrowing down for other issues. Naturally the max out of pocket for the buyer on the appraisal shortfall was part of the negotiations and written right into the contract via addendum. Appraisal completed two days ago, all is fine, closing in less than two weeks now. It works for everyone.  [By the way, there was another acceptable offer on the table but when I spoke to the Loan Officer she said she wouldn't allow her buyer to pay over the appraised value at all - so that killed that deal. Turns out, the buyer would have paid the difference but by the time her agent got back to me, we were under contract on the one where the LO didn't interfere with the buyers' offer.]  EDIT: Clarification: appraisal came in $13k under contract price - buyers appraisal condition was for a max of $12k above appraisal value. Seller came down that extra $1k and we are closing on time.

 

Anyway, OP, I don't understand your agent. How hot is your market? No one has unlimited funds to pay over appraisal - at some point you are going to have to set a boundary.  And that is exactly what you did - well done. Find an agent that will support your position rather than fight you.

Message 5 of 26
dursty87
Established Contributor

Re: Appraisal Contingency


@StartingOver10 wrote:

@elliott_bay_sunset wrote:

It really depends on your market. In my area, houses are going for 100k+ over list in bidding wars, and you don't have a chance if you include an appraisal contingency. That said, we aren't willing to buy a house for less than what it's worth either, which is why we are looking just outside of the city where houses are going for closer to list.


Yes, this is the critical point - the market at the time you are buying.

 

It is prudent to have an appraisal contingency for the buyer.  If you are in a rapidly rising market then you are virtually guaranteed that the appraisal will fall short of the contract price because there is a lag time by 30 to 60 days from those properties that go under contract until closing. Only closed sales are used to generate the value. Sometimes the appraiser augments with a pending or active sale, but uses the values from the closed comps.

 

OP, your solution of allowing $X to cap your potential out of pocket extra down payment is an excellent one. We use that here in our market because if we didn't the FHA/VA and other high LTV buyers would be locked out of purchasing in many neighborhoods now as the market is rapidly rising. It is smart to contain your extra funds so you are working with a known amount.

 

I am the selling agent on a property in the same situation as you describe - property put on the market and we received 7 offers in two days- had to go with the one that was willing to pay the difference between appraised value and contract price after narrowing down for other issues. Naturally the max out of pocket for the buyer on the appraisal shortfall was part of the negotiations and written right into the contract via addendum. Appraisal completed two days ago, all is fine, closing in less than two weeks now. It works for everyone.  [By the way, there was another acceptable offer on the table but when I spoke to the Loan Officer she said she wouldn't allow her buyer to pay over the appraised value at all - so that killed that deal. Turns out, the buyer would have paid the difference but by the time her agent got back to me, we were under contract on the one where the LO didn't interfere with the buyers' offer.]

 

Anyway, OP, I don't understand your agent. How hot is your market? No one has unlimited funds to pay over appraisal - at some point you are going to have to set a boundary.  And that is exactly what you did - well done. Find an agent that will support your position rather than fight you.


Thank you SO10.  I am buying in Orlando which I know is a very hot market(especially East Orlando where I am buying).  This house has been listed only 2 days and had multiple offers where the listing agent was asking for H&B by 5pm yesterday.  I understand the fact that houses are selling for more than list and most of the time over appraisal value but my concern is being stuck in a position where the house appraises $10k+ less and the seller isn't willing to negotiate.  At that point I would walk away and lose the earnest deposit which isn't something I am comfortable with either.  I offered $154k, list was $149, and I wanted the contingency to reflect $1k less than list which was $148k.  Thank you very much for your response as it clarifies my questions/concerns.

Message 6 of 26
StartingOver10
Moderator Emerita

Re: Appraisal Contingency

I know Orlando is hot - I am in West Palm Beach - not all that far from you.

 

The appraisal contingency is to keep you from losing your deposit. There is no reason not to have it in your contract. All appraisers have different abilities and skills. Some are just not up to par. On the example I gave you above (I added info just now), the appraiser didn't even appraise the property for the value as generated by the comps. Its a long story not appropriate in this thread - but as a buyer you have no control over who is going to actually do the appraisal and some appraisers are just not up to the job. You have to protect yourself in your contract because you don't know what kind of appraiser you will get.

 

But if the property fails to appraise on an FHA deal - you get your funds back. Read the FHA addendum - it is very specific. Your addendum actually gives a little leeway to the appraised value. Most sellers when confronted with the appraisal will negotiate, not all, but most.If your financing is conventional, then yes, your appraisal contingency, as I understand it to be, will allow you to get your deposit back. Rightfully so because now your finance contingency would kick in.

Message 7 of 26
Revelate
Moderator Emeritus

Re: Appraisal Contingency


@StartingOver10 wrote:

@elliott_bay_sunset wrote:

It really depends on your market. In my area, houses are going for 100k+ over list in bidding wars, and you don't have a chance if you include an appraisal contingency. That said, we aren't willing to buy a house for less than what it's worth either, which is why we are looking just outside of the city where houses are going for closer to list.


Yes, this is the critical point - the market at the time you are buying.

 

It is prudent to have an appraisal contingency for the buyer.  If you are in a rapidly rising market then you are virtually guaranteed that the appraisal will fall short of the contract price because there is a lag time by 30 to 60 days from those properties that go under contract until closing. Only closed sales are used to generate the value. Sometimes the appraiser augments with a pending or active sale, but uses the values from the closed comps.

 

OP, your solution of allowing $X to cap your potential out of pocket extra down payment is an excellent one. We use that here in our market because if we didn't the FHA/VA and other high LTV buyers would be locked out of purchasing in many neighborhoods now as the market is rapidly rising. It is smart to contain your extra funds so you are working with a known amount.

 

I am the seller's agent on a property in the same situation as you describe - property put on the market and we received 7 offers in two days- had to go with the one that was willing to pay the difference between appraised value and contract price after narrowing down for other issues. Naturally the max out of pocket for the buyer on the appraisal shortfall was part of the negotiations and written right into the contract via addendum. Appraisal completed two days ago, all is fine, closing in less than two weeks now. It works for everyone.  [By the way, there was another acceptable offer on the table but when I spoke to the Loan Officer she said she wouldn't allow her buyer to pay over the appraised value at all - so that killed that deal. Turns out, the buyer would have paid the difference but by the time her agent got back to me, we were under contract on the one where the LO didn't interfere with the buyers' offer.]  EDIT: Clarification: appraisal came in $13k under contract price - buyers appraisal condition was for a max of $12k above appraisal value. Seller came down that extra $1k and we are closing on time.

 

Anyway, OP, I don't understand your agent. How hot is your market? No one has unlimited funds to pay over appraisal - at some point you are going to have to set a boundary.  And that is exactly what you did - well done. Find an agent that will support your position rather than fight you.


Is there any recourse the buyer / seller have if stuck with an absurd appraisal outside of figuring out the difference between them at a price point the lender will accept?  Other than walking away which doesn't happen if you remove the appraisal contingency?  Admittedly you can walk away sans escrow, but that's suboptimal as a buyer.

 

Mistakes happen, we're human and so are appraisers so there's no immunity on that.  Also from what you intimate, on a rapidly appreciating market it's almost guarunteed the appraisal will come low.  How many deals fall apart on that in such a market?

 

I figured it depended on market, but so does earnest deposit too... apparently here 3% is common, and while I don't care regarding a 25K swing over 30 years (I've wasted way more than that even over the last 20 years), 25K right now is a big deal.  It may just be my personality and understanding that there is always another house, but I can't see exposing myself to this sort of problem if I were buying at my limit which allegedly is so often the case for home buyers.

 

I make good income compared to my expenses, even for me coming up with the money for a DP is non-trivial - in my case my escrow is roughly 14% of my DP - I could make that up out of savings but if I had to go straight income?  That'd set even me back by months (assuming I was still interested in shopping at that strata after that, presumably I liked the joint if I was trying to purchase it heh).

 

ETA: value of money is all relative, if I were in a 1% escrow situation at a cheaper price point to where it fell below my "trivial" line then sure why not; however, I can't see waiving my contingency personally if I care about the skin that I have to put into the game.  I know there's people out there that will abuse this over the size of funds traditionally in escrow accounts... if someone kicks my deal out for someone without an appraisal contingency, I'm am 100% OK with that: the other buyer can buy that ticket and take the ride.




        
Message 8 of 26
StartingOver10
Moderator Emerita

Re: Appraisal Contingency

Rev, there are a couple of questions you asked in your post.

1) What are the options: 

  • Buyer can pay over appraised value to meet sales price
  • Seller can reduce price to meet appraised value
  • Some negotiation in the middle
  • Walk away
  • Contest the appraisal - have an appraisal review.  An appraisal review on a FHA appraisal is fruitless. They will go through the steps but you end up with the same valuation and the property is stuck with that value for 6 months so even if the deal falls apart, the seller can't get another FHA financed contract.  It is different for conventional loans - pay for another appraisal and you are likely to get a different value. Also the appraisal doesn't poison the property value for six months like an FHA appraisal.

2) What happens to the EMD? 

It should be specified in your contract that if the property does not appraise, then the EMD is returned to you. After all, that is what a finance contingency is - and your lender can only finance the purchase price or the appraised value, whichever is lower.  So now you automatically can't get financing if the property doesn't appraise and the buyer and seller can't agree on another mutual value.

 

I really don't understand the reason for keeping the EMD if the property doesn't appraise. Otherwise why do we have these finance contingencies? It is a property valuation issue, not a buyer issue. Besides any decent listing agent is going to line up backup offers on the property if there is a doubt about the appraisal value and the contract closing.

Message 9 of 26
dursty87
Established Contributor

Re: Appraisal Contingency

Thanks again for your advice - I just heard back that my offer was accepted with the appraisal contingency so I'm pretty excited! I know this only begins the process but I'm keeping my fingers crossed for a smooth one.
Message 10 of 26
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