Appraisal Contingency: Waive It or Leave It?

A seller’s market had made the appraisal contingency a hot topic for spring home buyers in Bend and throughout Central Oregon. According to the April 2021 BEACON Report, homes for sale spent an average of four days on the market, and prices continue to climb. Low inventory and high demand keep the competition tight. Waiving the appraisal contingency is a strategy buyers might consider.  It can make their offer more attractive to a seller who may be swimming in offers.

What Is an Appraisal Contingency?

An appraisal contingency is a protection for the buyer. In the event that a home appraises at a value lower than the offer, an appraisal contingency allows the buyer to back out of the deal with no breach of contract. One alternative is for the buyer to make up the difference in cash. Or, the seller can lower the price. In general, all parties involved want a sale to go through once an offer has been made and accepted. However, in today’s market, most sellers have nothing to lose by moving on.

Why Do Appraisals Differ from Market Price?

Aimee Burnham, Sales Team Leader & Senior Sales Executive at Western Title & Escrow Company, has this to say:

“Sales of comparable properties do not always reflect the market’s reaction in real time when, as in this season, there are multiple offers (good market responses) and offers that exceed the asking prices and/or are beyond what comparable properties are selling for.”

Appraisals rely heavily on comparable home prices. That is, appraisals are set in relation to past prices of comparable homes in the neighborhood. These prices, however, do not accurately reflect current buyer enthusaism. Right now, a home can fetch well over asking price in a tight bidding war.

Pros & Cons to Waiving the Appraisal Contingency

Without an appraisal contingency, a buyer can be on the hook for the difference between the appraised value of the home they want to purchase and the offer. Buyers in breach of contract can lose their earnest money – the deposit a buyer puts down to demonstrate commitment, typically 1%-3% of the purchase price.

If all goes according to plan, the earnest money is put toward closing costs or the down payment. If, however, the home appraises below the offer and the buyer waived the appraisal contingency (and can’t make up the difference), that money is lost. This possibility, according to Redfin, is the reason only 20% of home buyers waive the appraisal contingency, even in this hot market.

So, why do it?

Plain and simple, waiving the appraisal contingency can give you the edge you need to win a bidding war in the Bend and Central Oregon real estate market. The challenges are:

• Low inventory of available homes for sale
• High demand for homes in Central Oregon
• Multiple offers on homes on the market

Data from the August 2020 National Association of Realtors Survey indicates that it is very uncommon for a sale to not go through because of appraisal problems. In fact, less than 1% of sales fail because of an unmanageable discrepancy between the appraisal and the offer.

Improve Your Odds with a Good Real Estate Broker

Buyers can boost their odds of making an offer and winning the sale with the help of an experienced broker. Knowledge is power! At Bend Relo, we have inspectors on retainer who can inspect the property before an offer is written, and a team of knowledgable brokers who can give you an estimate of what the appraisal would be and how much funds would be required for any given offer. We can set you up for success for the next offer, too.