Understanding the Appraisal “Waiver” Scenario in Home Buying

In Buyers, First-Time Buyers, Practical Tips, Real Estate Advice by Doug Phelps

In this competitive Denver metro real estate market, a buyer can better their offer position by “waiving” an appraisal objection. This means that a home buyer is willing to cover some or all of the differential of an appraised value that comes in below the offer price of a home. This strategy can be effective in getting an offer accepted, but it’s definitely important to understand how this works and what it means for you as a buyer.

A few words about the Denver housing market

In our very active Denver area market, with many buyers seeking similarly priced homes, the competition can be fierce. Buyers are often willing to pay more than the list price, that—if a listing agent is doing their job well—is representative of the market value.

Because of our competitive market, it’s reasonable to expect that this market value will be set at the top end. The “appraised” value and the “market” value are what appraisers work to reconcile for a lender. Sometimes, this leads to a larger difference between the purchase price and the appraised value.

Understanding the appraisal “waiver”

An appraisal waiver can be a critical piece to a home purchase, and often involves a mortgage loan and sometimes a cash buyer. There are three parts to understand—the purchase price, the appraised value, and any difference in dollars a buyer is willing to cover by extra cash at closing.

A lender is only going to loan against the purchase of a property at the appraised value. This is their legal yardstick. It’s also important to note that a strategy involving a partial appraisal waiver can only be used with deals involving conventional financing. It is not applicable to FHA or VA financing.

What is a Buyer to do?

There are a couple of ways that a home buyer can use the appraisal waiver strategy to their advantage.

In scenario A,  ​the buyer guarantees to pay the full difference between the appraised value and the purchase price. At no limit, this is the strongest offer​.

In scenario B, a home buyer can guarantee to pay the difference between the appraised value and purchase price—​up to X amount of dollars. This is less strong but still quite valuable in a competitive situation.

To put numbers to these

For example (scenario A): The list price is $320,000. Buyer makes an offer of $350,000 purchase price with the full waiver guarantee. The appraisal is $335,000. The lender lends to the $335,000 and the buyer brings the $15,000 difference to closing. Done.

For example (scenario B): 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. The seller and buyer renegotiate to a purchase price of $345,000 and the buyer brings the $10,000 difference to closing.

Of course, in scenario B, the deal could fall apart if the seller is not willing to come down to the $345,000 figure. Even though the buyer has guaranteed to go $10,000 above the 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 for a true win-win for all.

So, the decision you need to make as a home buyer considering an appraisal waiver is just how much above an appraised value you are willing to guarantee. It’s also good to know that any part of this difference can be in a form of a gift from a family member. ​

Updated:  28th March 2018