Buying A House - Should I Waive the Appraisal???
As someone who works with a lot of first time home buyers, the constant question I get is - "How do I buy a home in this real estate market???" Anyone who has watched the news recently, or talked to friends or family, has heard the horror stories of making as many as 10 or 15 offers on houses, only to be outbid by another buyer, many times a cash buyer who can close in less than 30 days and is offering everything, including their first born and the kitchen sink, to the sellers! I know exactly what you are thinking! It probably boils down to that choice of do I pay what is now rapidly rising rents, or do I buy a house?
So if you decide now is the right time to buy a house, there are things that you may have to compromise on in order to get the house. And, yes, you may have to make a lot of offers on houses before you get that first home under contract. There are lots of "sweeteners" being put into contracts so you need to decide what you are willing to do to "sweeten" the pot to the sellers, and what you are not willing to do!
One of the "sweeteners" is waiving the appraisal. Now, if you are like most first time home buyers out there, you probably are not able to pay cash for the house. That means you will probably get a loan, and one of the requirements for a loan is usually an appraisal! So you really are not going to be able to "waive the appraisal contingency". So what do you do!
If you read the Appraisal contingency paragraph in our contracts, it says that your purchase is contingent upon the property appraising for the purchase price. In the event that it does not appraise for the purchase price, then you have the option of going to the seller and letting them know what the home appraised for and asking for a price reduction to the appraised value. The seller does not need to reduce the price, but then you are not obligated to move forward with the contract. But it is possible that the appraisal will not be ordered for as long as 15 days after the contract is ratified, and then appraiser may have as many as 10 days to complete the appraisal. And if it doesn't appraise, then the seller will most likely have had their house off the market for almost a month! If you are competing with other offers, this may not be attractive to the seller!
So how do you compete? One way is to let the seller know that you are willing to make up some or all of the appraisal difference in the event of a low appraisal. For instance, if you make an offer on a property that is listed at $250,000 and you offer the seller a price of $270,000 which they accept - you could say in your offer that if the appraisal comes in lower than the $270,000 purchase price, then you are willing to make up $5,000 of the appraisal difference, then if the appraisal comes in at $260,000, you would then be paying $265,000 and you would have to bring that extra $5,000 to closing! This is one way to not completely waive the appraisal contingency but to make it a bit sweeter for the seller!
Another option may be working with the lender on a solution! So, again, let's say you found a property listed at $250,000 and you offered $270,000 - again, you will need to get a loan. But if you have a 20% down payment (which is equal to about $54,000 plus your closing costs), that means you have to bring probably somewhere around $60,000 to closing. However, if you agree to make up the appraisal difference, and the house appraises for $260,000 then you can always change your loan type and put down a lower down payment. So now, instead of doing a 20% down payment, you now choose to do 10% down payment, that means your down payment is only going to be $27,000 plus the closing costs. But that means you will have the extra money to make up that $10,000 appraisal difference. And now you will also have money available to pay the upfront mortgage insurance premium so you don't have to pay mortgage insurance as part of your monthly payment.
And if you are putting down 20% or more, will the lender require an appraisal? It is possible that you may not need to even have an appraisal done!
Another option would be to see if you can get gift funds from someone (a family member). If you have that option you will want to let the lender know and let your Buyer Agent know!
So as you can see, there are some options available to you. But it does mean that you have to decide what options you are able, and are willing to do in this crazy real estate market! Talk to your lender and talk to your Buyer Agent for guidance on what is the best option for you! And do this before going out to look at houses. Once you see that house that you want to call your own, you will have to move quickly and will have to make quick decisions!
As a Buyer Agent working with first time home buyers, please let me know how I can help you buy your first home! Even with this crazy real estate market we are in this year, it can be done! It just takes a little work and some creative strategies. Have a great day!