Cover an appraisal gap?
February 14, 2021 5:13 PM   Subscribe

We're looking to buy a house in a hot seller's market and are putting in an offer. The seller's agent indicated that the sellers would be interested in an offer that states we will cover any price differential between their purchase price and the bank appraisal. Should we do this? How can we determine how much above the appraisal price we can go?

We're first time home buyers. We have been looking for homes for about 2 months, have already made an offer on another house that wasn't accepted, and are ready to be done with the search.

We're going in strong on the offer for the current house (>10% above asking price, which is our max budget), but today our agent talked to the seller's agent who suggested the sellers are expecting many strong offers and would preferentially accept an offer that will cover the difference between the bank appraisal amount and the offer amount.

At our current offer, we are putting 10% down and have ~15% of our house savings to cover closing costs. I'm not really clear how covering the appraisal gap will work. It looks like we'd have to put down <10% and use the extra cash to cover the difference. But this difference could be a good chunk of change! How can we calculate how high over the appraisal we can go?

And as another question, is this just going to happen on every house we think we can afford? So many buyers are also waiving inspections. I don't see how we can be competitive buyers when so many home purchases have these selling tactics.
posted by stripesandplaid to Work & Money (15 answers total) 4 users marked this as a favorite
None of this makes sense. If the seller is so keen on making sure that they get what the bank says the house is worth, the way to do that is by getting the house appraised first, than asking for that figure. Not listing it and expecting sellers to come up with who the heck knows how much money later to bridge that gap.

This could blow up spectacularly in either of your faces, because no one knows how much the bank says it’s worth. As an example, if you offer $xx, the seller accepts it and the bank says the home is worth less than that, do the sellers reimburse you? Yeah, I thought not. I would run.
posted by Jubey at 5:29 PM on February 14, 2021 [4 favorites]

We're first time home buyers. We have been looking for homes for about 2 months, have already made an offer on another house that wasn't accepted, and are ready to be done with the search.

This is somewhat dependent on the market you’re in but it can take a lot longer than two months to find the right property, at the right price and it may take a lot more than two offers as well. So perhaps consider how realistic your expectations are here. Barring any future houses this is the biggest purchase you’ll make. Don’t allow sellers, agents or your own impatience to pressure you into poor decisions. You will literally have to live with these decisions for a long time and the cost to fix them is prohibitive. Good luck with your search.
posted by koahiatamadl at 5:47 PM on February 14, 2021 [16 favorites]

Best answer: Jubey, the sellers are asking that stripesandplaid honor the amount they are offering regardless of how much the bank thinks it's worth, the same as someone making a cash offer would not rely on a bank assessment. The sellers don't care how you come up with the money. It's crazypants but also a pretty normal request in some housing markets.

stripesandplaid, you might want to talk to your mortgage broker about this - they would be able to tell you how big of a loan you would be able to get approved for at various down payment levels, but basically how it works is the sellers want you to pay what you offer, and the bank wants you to have some minimum amount of equity in the house.

If you offer $500,000 but the bank thinks the house is worth $495,000, it's not such a big deal - to pay the owners $500K and still have an effective 10% of equity in the house you would basically need to put down 10% of $495,000 + the difference between the assessed value and your offer to get to 10%, so $49,500 + $5,000 = $54,500.

But if you offer $500,000 but the bank thinks the house is worth $450,000, it's a pretty big deal - you would need to put down $45,000 + $50,000 to get to 10% or $72,500 just to get to a 5% down payment.

If you have 15% available for a down payment (and remember the bank will not want you to spend every penny on this, so hopefully you have additional non-house savings), you could maybe afford to cover up to a 10% lower appraisal if the terms of a 5% down payment mortgage are acceptable. If you absolutely only have 10% available for the down payment you can afford to cover maybe a 5% difference.

Also let me just say: I have been where you are and we lost SO MANY places because we wouldn't/couldn't waive contingencies or come up with a cash offer, and it sucks so bad. We were looking for over a year (although we took a few months off because it was so awful). Multiple offers we lost not because of our offer price but because we were competing against cash offers and waived contingencies. One time we lost out because even though the seller said no offers considered before Tuesday someone made an exorbitant no-contingencies offer during the Saturday open house. We also had one offer accepted but we backed out after the inspection (serious structural termite damage), which made us even less willing to waive contingencies! But eventually we bought a place we really loved without waiving any contingencies and I'm so glad we waited. The people who bought a very similar house down the street from us right around the same time as we did had to put $50,000 worth of work into the electrical and heating systems in the first year they ended up living in the house. Like, not a new kitchen or anything fun or fancy: just stuff to make it safe and habitable.

Not owning a home when you want to is hard, but owning a home that you can't afford and/or that needs serious work seems much harder (I've only done the first one so I don't know for sure). Waiving inspection is for rich people.
posted by mskyle at 5:49 PM on February 14, 2021 [22 favorites]

Best answer: So, seller is saying this is a hot market and the comps (prior closed sales) will be lower than what they are hoping to get. First question is do you really want to be paying more than an appraiser thinks the house is worth? Be careful here!

Second, what they are asking is that you will increase your downpayment so that the bank mortgage is based on 90% of appraised value, anything over that you will have to pay. So if the house appraises at $500k, the bank is willing to finance 90%, you put 10% ($50k) down and mortgage covers $450k. If your offer is $550k, and it appraises at $500k, you will have to put $100k down because the bank won't loan more than $450.

That sounds like a big financial risk for you. If you planning on 20% down but could cover an extra $50-100k, fine but I think you are at your limit financially.
posted by metahawk at 5:53 PM on February 14, 2021 [9 favorites]

On top of this the county will spectacularly go way over the sale price value to set your property tax rate. We’re appealing ours but the county is so deep in debt they’re really not being fair about rates right now.
posted by waving at 6:12 PM on February 14, 2021

Mskyle, thanks very much for the education. I had no idea this happened, it is just crazy! Knowing this, I second metahawk by saying it sounds like a very big financial risk.
posted by Jubey at 9:57 PM on February 14, 2021

Just chiming in to say that this is becoming increasingly common in the market I'm looking in as well. It's crazy-making.
posted by lab.beetle at 10:00 PM on February 14, 2021

You’ve made your offer and maxed out your budget. Don’t get drawn into too many games.
posted by chiquitita at 10:12 PM on February 14, 2021 [1 favorite]

They are asking you to write them a blank check.
posted by jessca84 at 11:02 PM on February 14, 2021

I had this exact thing happen when I bought my house. It was appraised for much less than the purchase price so I could only get a certain amount for the mortgage. It just happened that I was putting down a much larger down payment than required because it was important to me to keep my monthly payments low, so the additional money required was already being covered by my down payment. If I was putting down the minimum and didn't have access to the additional cash required I would've had to drop out of the deal. I believe the contract was contingent on getting a mortgage, so I don't think I would've lost the deposit, but just saying that this type of thing can definitely happen.
posted by newpotato at 1:56 AM on February 15, 2021

This didn’t exactly happen to us, but our mortgage initially got rejected because the apartment appraised for less than our offer. We could afford the higher mortgage but could not afford to make up the difference. However we were able to push the bank to redo the appraisal with more appropriate comps and it all worked out. I would hate to be stuck on the hook if it didn’t. Not to mention, the inspection is really important!
posted by mai at 6:31 AM on February 15, 2021 [1 favorite]

It's the bank's job to value property for home loans, and they're excited to earn your business, so they're not going to appraise it artificially low on purpose. To agree to these terms is to make a giant financial commitment that you're smarter about valuing homes than the bank is. Is there a reason to think that is the case? If not, don't agree.
posted by Kwine at 6:51 AM on February 15, 2021 [2 favorites]

I may or may not do it if I had to, but I sure as hell would not communicate that to the sellers or their agent. I would just say, "we'll see what the appraisal says. we're not willing to make commitments for unknown amounts"
They are literally asking for a blank check.
posted by Dashy at 9:53 AM on February 15, 2021

In a similar market, my realtor recommended offering a partial waiver, to cover the difference between the asking price and my (higher) offer. That way it wasn't a total blank check - we would renegotiate if the house value came in lower than the sellers had claimed it was worth. If your sellers deliberately priced low to do a bidding war thing and were never willing to sell at the list price, that might not work.

I also gather that lenders are waiving the appraisal more often now. That's probably not something to rely on happening, but it happened in several home purchases I participated in or know about during the pandemic.
posted by mersen at 1:46 PM on February 15, 2021

Quick note on lenders waiving appraisals: they are waiving the requirement for an appraiser to develop a opinion of value on the property, because they have enough data in their systems to determine the likely market value. They are still lending based on a market value determination, which your sellers may or may not agree with.

In a very hot market, appraised value swings can be significant over short periods of time. Waiving appraisal could mean you need to bring a significant amount of money that you didn’t anticipate, or end up in default of contract and lose your earnest money. Once the market cools, you may also find that money evaporates if values stabilize at a lower level.

I bought in an extremely competitive market and refused to waive the appraisal or inspection contingencies, based on a long career of seeing what goes wrong after the loan closes. It took about 10 months, and several rejected offers, before I found the right house/seller, but I never considered waiving those contingencies. Seconding that you might need to plan for a longer purchase timeline.
posted by tinymojo at 6:18 PM on February 15, 2021 [1 favorite]

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