What Are the Implications When a Buyer Waives Appraisal in a Bidding War?

Real_Estate_Today_bylineWhen a home is priced at or below its likely selling price based on recent sales of comparable homes, there’s a good chance in this seller’s market that multiple offers could bid it up, possibly above the value an appraiser might give it. So what happens then?

Fortunately, I can report that the homes I have sold above the value suggested by comparable sales have not, as a rule, had trouble appraising for the contract price. Showing the appraiser the multiple offers that were received can demonstrate real-world market value. Without seeing those competing offers, the appraiser might determine that the buyer paid more than they should have. The presence of multiple, nearly equal offers gives appraisers an important tool for justifying value in our rising market.

Whenever a purchase is financed by a lender, there will be an appraisal. Lenders require them to make sure they’re not lending based on an overstated valuation. That doesn’t mean that the buyer can’t waive appraisal objection and bring additional funds to cover the discrepancy between appraised value and contract price. The contract may or may not specify a limit to the size of discrepancy the buyer will cover. Regardless, it is important for the seller’s agent to ascertain that the buyer is able to bring that additional cash to the closing table.

If the buyer is borrowing 95% or more of the purchase price, one might ask whether bringing several thousand extra dollars to the closing table is possible. This is where it is advisable for the listing agent to interview the buyer’s lender — something we do regardless of the size of the down payment. Typically, a buyer who is putting down 20% or more of the purchase price is more likely to have available cash to cover an appraisal discrepancy.

With Golden Real Estate’s auction approach, which maximizes the purchase price for our sellers, it is not unusual for the final price to be well above what comparable sales might support.  And because one can never be certain that the appraiser will be impressed enough by the existence of those other competing offers to justify the contract price, it’s a good idea to ask that buyers cover some or all of any appraisal discrepancy and that they provide evidence of their ability to bring extra funds to closing for that purpose.

Few buyers start out offering to waive appraisal, but once the bidding enters a range that is considerably above an appraisal based solely on recent sales of comparable homes, the listing agent can and should encourage waiving of the appraisal objection by the highest bidders.

One should remember, however, that an offer to waive appraisal objection is not iron clad when a lender is involved, because the buyer can still terminate based on loan objection if the appraisal ordered by the lender comes in too low for the buyer’s comfort. I’ve witnessed the scenario where a buyer who has agreed to waive appraisal objection still threatens to terminate because of the low appraisal, at which point the seller offers to lower the price to keep the contract from falling (assuming he doesn’t have a backup contract).

This is not unlike when a buyer agrees to purchase a home “as is” and use the inspection deadline only to terminate, not to demand any repairs. That can be a hollow promise.  If, for example, the buyer decides to terminate because the furnace needs to be replaced, the seller is likely to say, “Wait! I’ll replace the furnace!” Why?  Because the seller now knows the furnace needs to be replaced and would have to disclose that fact to the next buyer. Indeed, when I’m representing a buyer in what appears to be a bidding war, I will suggest making our offer “as is” while advising the buyer that it doesn’t mean we can’t get serious items repaired. The only time this doesn’t work is when the seller has received a backup contract that’s more attractive than ours. I point out to my buyer that the seller might be happy to have him or her terminate so that back-up offer can become the primary contract.

These two areas — appraisal and inspection — require deft skill in order to navigate the negotiation process effectively — a good reason to employ an experienced listing agent like one of us at Golden Real Estate instead of trying the for-sale-by-owner (FSBO) approach. A good listing broker can definitely justify his or her commission both in getting a higher selling price and saving money through effective negotiation.