Waiving appraisal contingency - how dumb is this?
April 22, 2018 10:14 AM   Subscribe

After an offer and a counter offer, we've hit upon a mutually agreeable purchase price, but seller wants us to waive the appraisal contingency. If we have the cash to offer $X above appraisal up to agreed upon price, is that a terrible idea?

See previous question here. We've made the decision to move forward, gotten our financing in order, and hired a real estate attorney (neither side is using an agent), who prepared an offer for us. We offered under asking price, sellers countered for less than half the difference, and we are cool with that price. Except... they want us to waive the appraisal contingency. (They did agree to our inspection contingency, and sent a very detailed disclosure form.)

This is not our first home purchase, but we bought our first (small, low value) home in cash from extremely motivated sellers for way under market value because it was in terrible condition (which we knew and didn't care because we planned to gut reno everything anyway) - so there was no offering and counter offering, contingencies, etc. We used the same real estate attorney and basically made a verbal agreement with the seller, walked into the attorney's office and signed some paperwork, and walked out with the keys after writing a check for purchase price plus a nominal lawyer's fee.

So we are torn about how to proceed here. On the one hand, we strongly suspect the appraisal will come in under the agreed upon price, which we were sort of counting on to lower our final purchase price (although we don't NEED a lower price for affordability - it's just that who wants to spend more money than you have to?). On the other hand, we REALLY want the house (see previous question for explanation of why this specific house is sort of the one-and-only for us) and have the cash to be able to offer $X above the appraisal price, up to their counter offer price... particularly because in the grand scheme of things, if we do the math right, the total amount of our down payment won't have to change. We were prepared to put more than 20% down, but if the appraisal comes in low than 20% of the home value will decrease such that we could still put 20% down and then throw the rest of our planned down payment at this "$X above appraisal" situation. [Does this make sense?]

However, it seems like overpaying for the house is kind of... dumb. But we also foresee this being our forever home, and plan to live there for a long, long time. We don't really care a ton about resale value. We are extremely invested in living in this specific neighborhood, and will probably end up over improving the house anyway, because we care more about location + living comforts than the wisdom of not putting more in a property than you can get out. So does it really matter if we overpay?

I've also read online that some banks will just reject the loan completely in this situation, even in the buyer wants to make up the difference in cash. Is that true these days? Is this something we can ask the lender ahead of time without sending up a red flag?

Finally, is there any way to estimate what the appraisal might be? Because of the uniqueness of the property (again, see previous question) there are literally no comps. We have a real estate agent friend who used his software to pull comps for us and literally nothing exists within a mile radius. Extending the radius leads to comps from a nearish, but totally different and MUCH higher end neighborhood, which would lead to an overvaluation of the house we want to buy - which, in this situation, actually works out well for us because we WANT it to appraise for the price we have agreed upon if the sellers are unwilling to move forward with an appraisal contingency in place. We've tried figuring a price per square foot from smaller properties to guess the value of the one we want to buy, and using the immediate neighborhood (which is not desirable to most) vs. the further away, but super fancy neighborhood, price/sq ft gives a difference of $150,000... so we are totally in the dark about what a random appraiser who might not know the neighborhood will say. The tax assessment is much lower than our agreed upon price, but that is the norm in our city and tax assessments are kind of all over the place, so that doesn't really help us much.

A few final pieces of info if it makes a difference - the total home value we are talking about here is in the $1XX,XXX range. Not crazy expensive in the real estate world, although a big step up for us. This is a cheap neighborhood in a cheap city. We also would not totally waive the contingency - we would only be willing to counter offer with something like "we will pay $X,000 cash over the appraisal price, but only up to agreed upon purchase price." We're not insane and also don't have $50,000 (beyond our down payment) cash if that's what the difference was. Finally, we strongly suspect that IF we refused to waive the contingency, the sellers would walk away because we know what they paid for the house and they've repeatedly said that they won't sell for less than what they paid... and we're assuming they paid over appraised value since they obviously think it will appraise for less than that. Lastly, we do have an inspection contingency and due to the age of the home, there will almost certainly be SOMETHING in the inspection that we could use as an excuse to walk away if we needed to.
posted by raspberrE to Home & Garden (24 answers total)
 
As my cousin says: If it works, don't fuck with it...and I mean, don't fuck with it!
It sounds like getting the appraisal could really backfire in multiple ways (rich nearby comps, seller backs out, also...house may appraise for more than both of you thought... and seller backs out) I would buy it and make up the (possibly imaginary) loss by doing some of the cheaper reno/decor stuff first and save up for the more expensive stuff.
posted by sexyrobot at 10:27 AM on April 22, 2018 [3 favorites]


Really? You signed a contract promising to pay the sellers a given amount and you are hoping a disinterested third party (appraiser) will give you a reason to make your promise null and void?

You wrote:
We strongly suspect the appraisal will come in under the agreed upon price, which we were sort of counting on to lower our final purchase price

If you suspect the property is worth less than you offered to pay for it, why on God’s green Earth did you ever bind yourself to paying more than what you “suspect” it is worth?


These are VERY sticky problems and everyone has money and time at risk here. What a dishonest way to treat this seller.


If you want professional advice, you should get it. But honestly, I’m not sure lots of professionals would be willing to sort this mess out unless you paid them hourly. And you really should pay your real estate friend that you screwed over if you didn’t pay him when you used his time knowledge and resources.
posted by littlewater at 10:36 AM on April 22, 2018 [1 favorite]


However, it seems like overpaying for the house is kind of... dumb.

If you think the house is worth that amount of money (and it's obvious you do), then you're not overpaying for it. Appraisals are *highly* influenced by offers on the market. In fact, the first thing the appraiser will ask for is the offer for the house. This sounds counter-intuitive, but from the appraisers perspective, the market is (reasonably) optimal, so the value of a house is, in fact, affected by the offers on a house. From an appraiser's perspective, the perfect comp is the offer itself, because the characteristics of the comp match the house in question 100%.

A house provides utility to you regardless of it's appraisal. You get a place to live regardless of the appraisal. You get comfort and security regardless of the appraisal. This is not to justify paying an absurd amount of money for a house, but simply to say that "overpaying" for a house is really your perspective, not the appraiser. The appraiser is applying a model to provide a rough idea of the resale of the house for purposes of quantifying the mortgage holder's risk in providing a loan. That's it. It has almost nothing to do with whether the house is worth it to you. That's on you. From the length of your post and from the thought you've put into this, I think you've decided the house is worth it to you. If so, you are not overpaying.

We also would not totally waive the contingency - we would only be willing to counter offer with something like "we will pay $X,000 cash over the appraisal price, but only up to agreed upon purchase price."

I think this is the only sane way to approach waiving an appraisal contingency. It proves that you know what you think the house is worth to you and that you are prepared to buy the house in the "worst case" with bounded liability to you. If the seller's reject this, I would be really skeptical of their motivations.

there will almost certainly be SOMETHING in the inspection that we could use as an excuse to walk away if we needed to.

This is often the case, but you should know that an inspection contingency (generally) only allows you to back out of the seller if the seller is not willing to remedy any defects found. Theoretically, if the seller responds to every inspection issue with them repairing the defect, the inspection contingency does not trigger. Rarely are sellers willing to do this, which is why inspection contingencies are quite useful to get out of a sale - especially because the inspection issue doesn't have to actually matter to you.

It sounds like getting the appraisal could really backfire in multiple ways

No mortgage company will offer a mortgage without an appraisal. OP wants a mortgage. Hence, OP needs to get an appraisal, the only question is whether to have an appraisal contingency, a partial appraisal contingency, or no contingency at all.
posted by saeculorum at 10:37 AM on April 22, 2018 [7 favorites]


(The bank will require an appraisal before approving the loan; the question is whether to agree to waive the contingency and remain under contract should the appraisal come up short.)

Maybe hire your own appraiser to get an idea of the number before the bank sends in theirs?
posted by notyou at 10:38 AM on April 22, 2018 [1 favorite]


Really? You signed a contract promising to pay the sellers a given amount and you are hoping a disinterested third party (appraiser) will give you a reason to make your promise null and void?

All standard offer documents in the USA contain an appraisal contingency. I have no idea what you're talking about here and I'm not sure you do either. The OP is talking about the exception (waiving a contingency), not the norm. These are standard real estate practices, and the OP is not screwing anyone over.
posted by saeculorum at 10:38 AM on April 22, 2018 [21 favorites]


For what it's worth, I've bought six houses and two of those were, in my opinion, pretty overpriced, but all six had the appraisals come back at exactly the contract price. I've heard about appraisals coming in low but always third-hand, I don't know anyone personally who have been in this situation so I think it's pretty rare. We also tend to buy houses with no good comps so I think especially in those situations, when the appraiser doesn't really have much to work with, they just make it come out at the contract price. All of which is to say that it probably won't matter in the long run.

I also am of the opinion that if it's the right house for you, and it's a price you're happy to pay, then you should do what it takes to buy the house. I would personally agree to waive the contingency if there were literally no other houses that would work for me and if I did no feel like I was paying too much at the contract price.

These are VERY sticky problems and everyone has money and time at risk here. What a dishonest way to treat this seller.

Dude, no. If anything the seller is the one creating this sticky situation. Your entire comment is really harsh for no good reason.
posted by rabbitrabbit at 10:39 AM on April 22, 2018 [12 favorites]


I’ve never disclosed this on metafilter but I’m a Realtor.
I’ve been doing this for over a decade.
Not all offer docs contain an appraisal contingency and how appraisals are handled varies by transaction.
posted by littlewater at 10:41 AM on April 22, 2018 [4 favorites]


When I first read the top, my initial reaction was "They know something you don't, and it's not good for you". But reading further they seem to have no problem with the inspection contingency, so It's less likely they're hiding something about the condition of the house (which wouldn't really have a huge effect on appraisal anyway unless it's a major structural issue).

With that said, I think in the end it's really up to you and how much you want the house, and whether you want it enough to not care if it appraises for less and it ends up costing you money out of pocket. If you truly expect it to be your forever home, then making the purchase is much less about resale and your LTV and more about how much you will enjoy the home.

I wouldn't factor in the down payment percentage change since ultimately you're paying the same for the house. If, for example, the sale price is $150k and assuming you will finance appraisal - 20%:

Appraisal is $120k = $96,000 mortgage + $24,000 down payment + $30,000 cash difference = $54,000 cash at closing
Appraisal is $150k = $120,000 mortgage + $30,000 down payment, no cash difference = $30,000 cash at closing

In the above example the down payment difference is only $6k - not pennies, but smallish in comparison to the overall cash you'll need to close the deal. Yes, you pay $6k less down payment but you end up paying $24k more in cash overall. So I wouldn't use that as your justification.

But again ultimately in your situation I think it boils down to how much cash you are willing to part with vs. how much you really like the house. If you get a 15 year mortgage, then in 15 years it won't matter how much the house is worth or what you paid for it, because it's paid off and the house's value won't be any different unless you've made significant improvements to it that you would only to be able to make in one of the two scenarios above.
posted by SquidLips at 10:44 AM on April 22, 2018 [3 favorites]


I had a friend buy an apartment where the appraisal came in low (in NYC! I know!!!). The bank ended up not approving the mortgage. But I believe she didn't have the cash to make it up entirely. That is the risk, though. A lot of people got caught in those gears when the housing market froze up in 2007ish.

You signed a contract promising to pay the sellers a given amount and you are hoping a disinterested third party (appraiser) will give you a reason to make your promise null and void?

So...an appraisal contingency, as one could learn if one spent, oh, five seconds Googling, is a clause in a contract allowing the purchaser not to close without penalty if the property is not appraised for at least a certain value. This clause is ordinarily included to protect the buyer, as the bank may, as with my friend, refuse to write a mortgage if the collateral for the loan--that is, the property itself--is not as valuable as they thought it would be, leaving the buyer in a bad situation, possibly losing all their earnest money since they can't complete the purchase without the mortgage. This is a clause that both parties would agree to if the contract was signed (it hasn't been yet). Now, as part of the negotiations over the terms of the contract, the seller is asking the buyer to give up that protection.

Of all the scenarios in which to get het up and accusatory about the moral sanctity of a contract, this is in at least the top five most silliest.
posted by praemunire at 10:53 AM on April 22, 2018 [2 favorites]


OP which state are you in?
Is this an FHA or DVA loan?

Rules by state and loan program vary wildly.

Conventional loans in my state will leave you locked in regardless of appraisal amounts.
posted by littlewater at 10:58 AM on April 22, 2018


If I understand it correctly, you were planning to use a lower appraisal to further negotiate the price of the home down from the one you agreed on? It sounds like the sellers have made it clear that they won't really go lower, so there's probably not a lot of leverage to be had there. You guys have already agreed on a price that is very affordable to you. Since it sounds like you have compelling reasons to buy this exact house, it seems pretty reasonable to say that you'll pay up to $X over the appraisal to keep you at the price you already agreed to.
posted by The Elusive Architeuthis at 11:00 AM on April 22, 2018 [4 favorites]


However, it seems like overpaying for the house is kind of... dumb. But we also foresee this being our forever home

Then it's not dumb. I work for a town board where we regularly deal with people who think their tax bills are too high because of their house's appraised value vs the tax roll value etc etc. And one thing I've learned is that appraisals are highly variable. So unless you think there is some smoking gun somewhere that is going to make the appraisal come in super low (most issues which would show up in the inspection - but think about neighborhood issues and nearby development possibilities and maybe a neighbor who is feeding rats) that would endanger your financing, I would just assume whatever little bit extra you might be paying will be worth it for a forever home.

And then ignore friends and "well-wishers" who look at all of these transactions as an opportunity to cutthroat negotiate with other people and if you pay anything more than the absolute minimum, you are an idiot. There are many different ways to approach a financial transaction, and while you may need to give up the idea of using the appraisal as an opportunity to further negotiate the price (and as you said, you have the inspection for that) it sounds like there are other reasons for you guys to try to make this work even if it means not getting the absolute lowballest price.
posted by jessamyn at 11:15 AM on April 22, 2018 [4 favorites]


Response by poster: Woah - thanks to those of you who responded to littlewater's comment. We have NOT signed a contract (hence, the word offer...) or accepted their counter offer. That is the whole point of this question. We are not bound to anything, and we certainly did not "screw over" our friend who offered of his own accord to do the about 2 minutes of work it took to type the address into his comp software. We are obviously paying our professional lawyer here... who has no issues with this "sticky situation." Geez.

This is a conventional loan and we are not locked into anything yet, as again, we have not signed anything with either the seller or our bank. We merely have a loan estimate and an unsigned offer letter.

Squid Lips, the math is more like, that in your example, we were already planning to put $54k down so the distribution of what that goes to will change but our cash at closing won't.

We are leaning towards what most people have said above - the sellers obviously aren't interested in a lower price, regardless of appraised value, whereas we really want this exact house, and can afford it, and plan to live there a long time - so we should go for it. That was our initial gut feeling, but just wanted to confirm with the hive mind that this isn't crazy.

Sounds like we will confirm everything with our lawyer and then probably move forward.
posted by raspberrE at 11:19 AM on April 22, 2018 [3 favorites]


I think you’ll regret it if you can afford it and don’t go for it. It sounds like you love the house, and you’ve been looking for long enough to know how hard it is to find a house you love. I’m in the process of buying right now too, a similar situation with nothing similar around and very hard to find comps - and it did end up appraising at offer.
posted by something something at 11:33 AM on April 22, 2018 [2 favorites]


It sounds like you really want this, so I wouldn't overthink it. I would protect your earnest money by counteroffering that you won't waive the contingency but you will put in cash up to X above appraisal. I suppose if you really wanted it, you could say "up to Y above appraisal," where Y means you putting 5% down instead of 20 percent down. Do you think that would kill the deal, if you tried to set limits rather than waive it entirely?
posted by salvia at 11:53 AM on April 22, 2018


You're not overpaying if that's the price they want and that's the price you're willing to pay.
posted by bongo_x at 11:56 AM on April 22, 2018 [3 favorites]


Response by poster: salvia- we think there is a possibility that setting limits, rather than waiving it entirely, WILL kill the deal, but we just can't afford the risk of waiving it entirely because if it somehow appraised for, say, $40,000 less than offer price, well... we just can't afford that. Much as we would like to be able to. It's likely that (given the offer price and the average price/sq ft in our neighborhood) the difference will be more like half that, which we could afford, but we don't want to take the (probably unlikely) risk that we're on the hook for some crazy amount of cash that we don't have. We are pretty unwilling to put less than 20% down and then have to pay PMI and a much higher monthly payment... we have all the numbers worked out to fit our budget just how we want right now.
posted by raspberrE at 12:16 PM on April 22, 2018


Our place appraised for less than our offer, and the bank initially declined to give us a mortgage even though the price was within our means. We pushed them on it and they re-appraised, but that only came out in our favor because the market in our neighborhood is pretty strong. You could get stuck here.
posted by mai at 12:45 PM on April 22, 2018


This really depends on the market. For my most recent home purchase we waived all contingencies including appraisal because we kept getting outbid and needed to be competitive as fuck. This house ended up having a TON of issues but still appraised exactly at our offer price because the market in my area is so hot and there was another offer for the same amount. Appraisers do take into account other offers as well as the competition in the market and what other houses in the neighborhood sell for. Even if the house has tons of issues and is overpriced.

So, it's not entirely crazy depending on where you are buying.
posted by joan_holloway at 3:34 PM on April 22, 2018 [1 favorite]


What the seller is asking for here seems perfectly reasonable. They are not demanding an inspection waiver. They are only asking for an appraisal waiver. Their reason for doing this is to screen out buyers with potentially sketchy financing. They don't want to put the house under contract, then a month later find that the deal goes south because the buyers can't come up with a few extra thousand dollars to close the deal and then have to put the house on the market again.

By waiving the appraisal contingency you are signalling to the seller that you are more likely to have the financial means to complete the deal.
posted by JackFlash at 4:17 PM on April 22, 2018 [2 favorites]


I've also read online that some banks will just reject the loan
in this situation, even in the buyer wants to make up the difference in cash. Is that true these days? Is this something we can ask the lender ahead of time without sending up a red flag?


This happened to me, but it was in 2011. My ask about this, ugh. I was extremely fortunate that I was ultimately able to get a mortgage with another lender, but it was a horrible, drawn-out process and I almost lost the house multiple times. I will say that due to this I think appraisals are bullshit. They're for the bank, not you.
posted by Violet Hour at 1:16 AM on April 23, 2018


Oh, and I should say that when we ultimately closed the appraisal from the second bank (Wells Fargo) was for less that the accepted offer, and I paid part of the difference as a larger down payment, and the seller came down a bit as well. Considering how much home values have gone up since then, it was absolutely worth it.
posted by Violet Hour at 3:26 AM on April 23, 2018


I will say that due to this I think appraisals are bullshit. They're for the bank, not you.

I mean - they are and they're not.

A story - my parents bought a house way back when and had the appraisal come in much below their offer due to some land boundary discrepancies. They ponied up all of their savings to make up about half the difference and we moved in.

Three years later - my dad's job transferred him and we had to sell the house. It turns out - the appraisal was right on and those boundary issues, the need for a new house, and a sagging market that the appraisal predicted led to us taking ~ a $100k haircut on the property. That wiped out my parents' savings, any hope of a downpayment, and they've never been able to own a home since.

The appraiser tried to warn my parents and they didn't listen. Over the long term, that wouldn't have been such a big deal, but in the short term it can be disastrous.

Appraisals are a good thing - yes, the protect the bank by ensuring they're not giving you money against no asset, but they also protect you by ensuring that what you're paying for is worth what you've agreed to. Especially for a property without a lot of comps - in addition to the issues that will arise (and potentially lead to a loss in deposit if you can't make up the difference or do not want to) in getting the mortgage, you will also lengthen the asset appreciation timeline significantly if you pay well over appraisal for it. This is not so bad if you end up in the property forever, however if things were to change - you could take a big financial hit like my parents did.
posted by notorious medium at 9:25 AM on April 23, 2018 [1 favorite]


What the seller is asking for here seems perfectly reasonable. They are not demanding an inspection waiver. They are only asking for an appraisal waiver. Their reason for doing this is to screen out buyers with potentially sketchy financing.

That doesn't sound right. I've bought a few homes and have always had an appraisal contingency, because if the appraisal comes in low then the bank might refuse the loan outright, in which case I have to back out of the contract and lose my good-faith money, I have to make up the difference, or I decide that I can't make up the difference and back out and lose my good-faith money. It puts me at too great a risk. My financing and credit has always been outstanding, FWIW.

When I sold my home the buyer wanted an appraisal contingency and I said "Sure, why not? Doy. Of course you do". I just consider this part of doing business and if the seller disagrees then I'd be worried that either I'm dealing with a lunatic (which is its own barrel of fun) or that the market is so hot that they are confident they can sell it to someone else. Thus it's either a home you don't want or won't be able to get.

I don't think the seller is being remotely reasonable.
posted by It's Never Lurgi at 2:43 PM on April 23, 2018


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