Appraisal Waiver vs. Modification

How much money do you have?

Okay, maybe that’s a little aggressive.

But, in this absurd seller’s market, the question is relevant.

Buyers are waiving the appraisal portion of their financing contingency in order to stand out to sellers. As a consequence, they’re being forced to come up with more cash.

By way of review, consider the following example, which supposes conventional 80% financing:

Purchase Price: $500,000.00

Financing Contingency: $400,000.00

Cash from Buyer (exclusive of closing costs and pre-paid items): $100,000.00

Therefore, for the buyer to qualify to borrow $400,000.00, the home needs to appraise for $500,000.00. If the home appraises for $450,000.00, the bank will only lend the buyer 80% of 450,000.00, or $360,000.00 to buy that home. Using the traditional financing contingency, the buyer at this point can terminate the contract and get their deposit back or use the leverage to renegotiate the price.

So, as a practical matter, there is an appraisal contingency housed in the financing contingency; unless the buyer actively waives that appraisal contingency. Which is what we are now seeing happening.

Using the same example from above, if the following words appear in the offer, “BUYER HEREBY WAIVES APPRAISAL,” and the appraisal comes up short at $450,000.00, that buyer has no right to terminate the agreement and no leverage to renegotiate the price. Now, instead of coming up with $100,000.00 cash, the buyer MUST pay the $500,000.00 for the house and now come up with $140,00.00 to cover what the bank will not lend or risk non-performance and expose their earnest money deposit.

Those four words are very easy to write at a kitchen table and punch-weary buyers are fast to agree. I’ve had countless conversations with buyers, after the fact, who say, “I can come up with another $40,000.00, but not another $80,000.00,” while bound to an offer with no appraisal protection whatsoever.

So, what can we do?

If this is something the buyer is willing to do, set a limit.

Here are some ways to clarify or modify the appraisal requirement of a financing contingency without endangering your Buyer. Consider some version of the following language:

In the event the appraisal procured by the Buyer’s lender indicates a value of the premises of at most $25,000.00 below the agreed upon purchase price, BUYER shall not have the right to terminate this agreement due to an inability to obtain financing for the sum indicated herein. Buyer retains the right to assert all protections in said financing contingency for any deviation in value greater than $25,000.00.

Or, supposing a purchase price of $500,000.00.

In the event the appraisal procured by the Buyer’s lender indicates a value of the premises of $480,000.00 or greater, BUYER shall not have the right to terminate this agreement due to an inability to obtain financing for the sum indicated herein. Buyer retains the right to assert all protections in said financing contingency should said appraisal indicate a value of less than $480,000.00.

However you and your buyer wish to proceed, if you have clients that have this language as part of their offer, it’s okay, call me.