Appraisals and Waivers

Appraisals can often make or break the sale of a home, so it is important to know what role they play during the transaction process. Lenders hire appraisers to assess the value of a home to ensure that the mortgage company does not overpay on their investment. This is why appraisers play a very vital role in making sure a buyer can receive the appropriate and needed financing to buy the home from the seller. Here are examples of different appraisal scenarios that can occur during a transaction:

Low Appraisals Offer $350k → Appraised Value $320k

If an appraisal is lower than the initial offer price the buyer submitted, the lender has no choice but to only grant the buyer no more than its appraised value (buyer will receive a loan for $320k, not $350k even if the initial pre-approval stated a loan value of  $350k). There are different ways to approach this outcome:

• The buyer is protected by the Third Party Addendum, if the appraisal is met lower than the offered price, the buyer may leave the transaction with returned earnest money.
• The buyer makes up the difference between the appraised value and offered value. The buyer will front the missing $30k at closing to close on the offered price.
• The buyer and seller negotiate further to meet a middle ground (aka, seller’s concessions, buyer covers partial costs, other repairs, etc.)
• The seller may sell at the appraised value instead of the initial offered price.

High Appraisals Offer $350k → Appraised Value $370k

If an appraisal comes out higher than the initial offer price, the buyer receives the originally intended funds to purchase the home. In this case, the buyer will receive the $350k to purchase the home, not $370k where the appraiser has valued the home. However, this is still an ideal position for the buyer, as it means purchasing with some established equity on the home once closed.

• Note, the seller is not obligated to know how much higher the appraisal is; it is up to the buyer if they would like to share this information with the seller

The Waivers

In a strong seller’s market, the popularity of the Addendum Concerning Right to Terminate Due to Lender’s Appraisal gives buyers an advantage against other competitive offers. This form can also help further protect buyers when they are unsure of the value of the home and its ROI; however, with this form’s benefits, comes great risks. Let us break down what this form outlines:

• WAIVER: The buyer waives all rights to terminate the contract under Paragraph 2B of the Third Party Financing Addendum. The buyer must make up for a low appraisal, and will not be able to leave the transaction without risk of potential legal damages and/or additional monetary costs (losing earnest money, liquidated damages, etc).

• PARTIAL WAIVER: Buyer waives some rights to terminate the contract under Paragraph 2B of the Third Party Financing Addendum. The buyer can still purchase the property so long as the appraisal does not value lower than “X” amount specified in Paragraph 2(ii) of the Addendum Concerning Right to Terminate Due to Lender’s Appraisal. The buyer may still need to make up the cost difference between appraised value and offer value; but, if the appraised value is lower than “X”, then the buyer has the right to negotiate price further or terminate the contract with returned earnest money

• ADDITIONAL RIGHT TO TERMINATE: The buyer keeps all rights to terminate under Paragraph 2B of the Third Party Financing Addendum AND the buyer may terminate within “X” amount of days after the contract has been initiated if either the appraised value comes below “X” amount (copy of appraisal to seller is required). The buyer is also guaranteed back the earnest money should the buyer terminate for these reasons.

Please Note: When considering usage of this addendum and other questions regarding appraisals and their importance, it is best to consult with your real estate representative and lender to help assist you when altering your offer to best suit your situation. To have a fulfilling experience finding and selling your home, be sure to entrust your questions to your preferred real estate professionals.