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.
@StartingOver10 wrote:
@Anonymous 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.