Some Clarity to The Appraisal “Waiver” Scenario

In Sellers by Doug Phelps

In this competitive Denver metro real estate market, a buyer can put their offer into a better position by “waiving” the appraisal objection. I want to try to bring some clarity to this appraisal “waiver” scenario that is a critical piece to a purchase involving a mortgage loan. This is a strategy that can be effective to get an offer accepted. There are three parts — the purchase price, the appraised value, and any difference in dollars a buyer is willing to cover by extra cash.

A lender is only going to loan against the purchase of a property at the appraised value. This is their legal yardstick.

In our very active market, with many buyers seeking similar-priced homes, the competition is fierce. Buyers can be willing to pay more than the list price, that — if a listing agent is doing their job well — is representative of the market value. And because of our monthly rising market, to set this market value at the upper end of the spectrum is reasonable to expect. The “appraised” value and the “market” value are what appraisers work to reconcile for the lender.

Sometimes a buyer perceives in his/her motivations that they see a market value above what the listing agent sets as market value in a list price. But go too high and a lender is going to have trouble with it, as an appraisal won’t support it. So, what is a buyer to do?

A buyer can (a) guarantee to pay the difference between the Appraised Value up to a maximum of the Purchase Price. This can be at no limit, which is the strongest offer. Or, it can have some limits, like —
Buyer can (b) guarantee to pay the difference between the Appraised Value and Purchase Price, if any, up to $x. This is less strong but still valuable in a competitive situation.

To put numbers to these:

For example (a): Say, the list price is $320,000. Buyer makes an offer of $350,000 with the guarantee. The appraisal is $335,000. The lender will lend to the $335,000 and the buyer brings the $15,000 more to closing. Done.

For example (b): Say, the offer is $350,000 and states that the buyer will pay up to $10,000 difference between the Appraised Value and the Purchase Price. The appraisal is $335,000. The lender will lend to the $335,000.
So, the seller and buyer renegotiate to a Purchase Price of $345,000 and the buyer brings the $10,000 to closing.

Of course, the deal could still fall apart if the seller was not willing to come down to the $345,000 figure. Even though the buyer has guaranteed to go $10k above appraised value, the seller is not obligated to accept anything less than the agreed upon purchase price. Hopefully all parties want to keep it going to, truly, a win-win for all.

The decision is, how much above an appraised value is a buyer willing to guarantee?

BTW, know that any part of this difference money can be in a form of a gift from a family member.