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Ask Adam: To Waive or Not to Waive

by ARLnow.com — March 19, 2013 at 2:00 pm 1,103 19 Comments

This regularly-scheduled sponsored Q&A column is written by Adam Gallegos of Arlington-based real estate firm Arbour Realty, voted one of Arlington Magazine’s Best Realtors of 2013. Please submit follow-up questions in the comments section or via email.

Question: I’m planning to purchase a home in Arlington this spring and have heard stories about how crazy the market is getting. I’ve read about people waiving their appraisal contingency in markets like this. Can you explain how that works?

It’s important to first understand why someone would consider this strategy… residential appraisers primarily employ the sales comparison approach to determining a home’s value. This method is heavily reliant on past comparable sales. In situations where a home may sell for more than the recent sales prices of comparable homes (i.e. due to competition from multiple offers), the property may appraise for less than the agreed upon sales price.

If an appraisal comes in low, we usually use it as leverage to try and negotiate a lower sales price. It isn’t exactly fair to the seller because they agreed to a higher price at the onset, but sometimes it is necessary for a buyer to be able to continue with the purchase. Therefore, you can see how waiving the appraisal contingency up front would strengthen an offer by relieving the seller of having to worry about whether a contract they are considering will appraise for the agreed upon purchase price or not.

From a purchaser’s perspective, waiving the appraisal contingency could result in a situation that requires more funds than initially expected, change the loan terms (i.e. monthly payments could be more expensive) or even cause the contract to be in default if the purchaser is unable to proceed with the purchase.

Based on the loan program you use, the lender will require a minimum amount of equity on your part. In turn, they are only willing to finance the balance of that equity. For instance, if your loan requires a minimum of 20% owner equity, it will lend up to 80% of the lower between purchase price or appraisal value. If you are stretching financially to meet the minimum requirement of your loan program then waiving the appraisal contingency is not an option for you.

If you are putting down a lot more money than is required by your loan program, then waiving all or a portion of the appraisal, contingency may be an option, one you could consider very carefully. In this situation it might affect your down-payment or monthly payments. However, it eliminates your leverage to try and negotiate a lower purchase price if the appraisal comes in low.

Below is a simplified example of how this works:

For a purchase price of $500,000, you are planning on a $200,000 down-payment and a $300,000 loan. You are obtaining a loan that requires 20% equity, therefore the loan program is willing to lend 80% of the lesser: appraisal or purchase value. With a $200,000 down-payment and $300,000 loan, as long as the home appraises for more than $375,000 your down-payment and monthly payments will not be affected.

On a $500,000 purchase, I’m hoping you are confident that it will appraise well in excess of that minimum threshold. For the sake of this example, let’s say it only appraises for $350,000. In this situation, you will need to increase your down-payment to $225,000 and instead of borrowing $300,000 as originally planned, you will now be borrowing $275,000.

This example assumes you have the financial ability to increase your down-payment if needed. If not, you may have to consider a less desirable loan program and if there is not one available, you could be facing default.

If you are thinking about waiving your appraisal, it is important to understand the worst case scenarios. Talk over your situation in detail with your lender and real estate agent. Please be clear that I am not encouraging you to employ this strategy. In fact, I am cautioning that it should be considered an advanced technique that should be used with extreme care.

The views and opinions expressed in the column are those of the author and do not necessarily reflect the views of ARLnow.com.

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  • Rachel

    Not a question, but can we get a cuter real estate guy? Adam is ok, but not hot. Oh well, a girl can dream!

    • ARL

      Post your pic so we can rate you, Rachel.

      • Raises hand

        I volunteer to judge as an impartial 3rd party.

        For science.

  • Hank

    Hello Adam,

    I will be using an FHA loan so I cannot waive an appraisal even if I would want to. Because of this, I think my offers will not be as competitive as others. I understand the offer I recently lost out to was “cash only” and waived contingencies including inspections and appraisals. I lost the bid despite the fact that I included an escalation clause that rose to more than $40,000 over the listing. So in summary, am I screwed? How can I compete with cash only offers with no contingencies, short of offering to engage in familial relations with the listing agent?

    Thanks!

    Hank

    • Adam G

      I don’t think you are screwed. A lot of buyers are going through the same thing right now. Even if you were financing with conventional, it would have been tough to compete with the “cash” offer. Not every seller is biased against FHA. It will help if your lender can expedite your appraisal so you don’t have to request the standard 21+ day contingency.

      • Hank

        Are you seeing a lot of these cash offers? I’m thinking that cash offers may be typical for places that need some work and can be potentially flipped. Thanks.

        • Adam G

          I am not seeing a lot of cash offers.

    • ARL Homeowner

      You aren’t screwed in the market in general; you were just screwed on THAT purchase b/c it’s almost impossible to compete with a cash offer with no inspections or contingencies as it’s just about the lowest possible risk from the seller’s perspective. Cash offers certainly do happen around here, but are by no means the norm at these prices. Adam would have better real-world estimates, but I’d be shocked if they were more than 10 or 20 percent of sales.

      FWIW, I purchased a hyper-competitive property in 22201 and won a multiple bid situation by paying an extra $25K up front plus an additional $25K escalation and waiving the inspection. But even that wasn’t a slam dunk. We also had to greatly double our already high earnest money deposit up front as well as accept the property “as-is” in order to seal the deal. You’ve got to play hard and take chances if you want something that many others do as well and are prepared to pay for. You’ll get there – just know that it may take several tries and a strong stomach.

      • Hank

        I’m glad to hear cash offers aren’t super common; thanks for letting me know. And good idea about the increased earnest money and up front cash. We had upped the earnest money, but perhaps we should up it a bit more in the future. My main concern now is the lack of inventory.

  • http://www.facebook.com/backflipbob Bob Adamson

    Good Advice Adam, and well explained. I rarely ever have my Buyers waive the Appraisal, but have done so to win in multiple offer scenarios when my Buyer has adequate capital to move forward despite the appraised value.

  • Ali Karim Bey

    Adam: Please can you comment on buying condos in the Clarendon-Virginia Square-Ballston corridor, given the excellent access to public transportation. My family and I are interested in a small condo (1 or 2 bedroom). What’s a good starting point? Is this a better area or are other other options

    • Keith Friehl

      No. I would try near seven corners

      • AKB

        Isn’t it true that pub-trans. is not so good there? Do you have specific condos that I should consider? Thanks!

    • Adam G

      I’m more than happy to comment on condos between Clarendon and Ballston, but can you please be more specific with your question? You are also welcome to email.

      • AKB

        Adam — Thanks much. I am interested in a condo near Ballston-Virginia Square-Clarendon (BVSC corridor). I see many rental apartments (I live in one-bedroom) but not many condos. Where are the best condos (also most newer)? Should I get a realtor to help? If BVSC corridor is not good, then suggest other places. I like the BVS (not so much C) as it is more quiet and not very noisy area. I could never live near DuPont or U-Street. Too noisy, too busy. After a busy day at office, I would like to relax with my family. Also, the public transportation is good near BVSC. So, please provide insights. Someone said that I should try Alexandra corridor. What are your thoughts? Thanks!

  • Hokie

    Adam, When I bought my condo I had to put “good faith” money with the offer. If somebody wasn’t really inclined to lower the price once an appraisel is done- wouldn’t the buyer be the one backing out, and thus forfeit that good faith money to the seller?

    • Adam G

      Using the standard Northern Virginia contract you would have the ability to cancel your contract without risking your earnest money. Disclaimer: consult an attorney before doing so as I am not one.

  • Zen

    This is just a general question. The current maximum for a jumbo loan is $729,750 for the area I believe. Do banks actually give these loans out still? What if I would need a little more, like $800k? Thanks.

    • ARL Homeowner

      I’d welcome somebody more knowledgeable to chime in, but my understanding is that the $729K figure is for a “jumbo conforming” loan; one that is larger than a true conforming, but is treated as such due to the higher median price of property in the area. If you are above that and into a true jumbo, there really is no upper limit as it’s only a function of your income/assets, credit, and the value of the property. So for example you could get an $8M loan for a $10M property assuming you had the income and credit. The only difference is that you’ll pay a different (read: higher) interest rate than you would on a conforming loan.

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