Gulp…You Waived the Appraisal Contingency, Now What?

OK, so you have prepared and weighed your risks and have decided to waive contingencies on your offer.  Does that mean you don’t have to get an appraisal?  Nope!  Even if your offer is free of financing contingencies, the bank still requires an appraisal as they need to prove value to support the loan. As discussed in my previous article How to Compete in the Zany San Francisco Real Estate Market reducing or removing contingencies is a strategic way to make your offer more competitive.   

Let’s review how an appraisal impacts a loan.   

There are 3 potential outcomes from an appraisal

1. The appraisal comes in at value –the appraisal is equal to the amount of the offer accepted. Most common scenario

2. The appraisal comes in under value – the appraisal is under the amount of the accepted offer. Not common in today’s climate but need to call out that this can happen and how it impacts cash needed to close

3. The appraisal comes in over value – the appraisal is over the amount of the accepted offer. Not common as banks don’t want buyers to think they have equity right out the gate and want to take out a line of credit on the equity

How the bank responds to the outcomes

1. At value - all moves forward with loan as committed on the loan approval

2. Under value - the bank will only loan on up to 80% of the appraised value. The buyer is responsible to make up the delta in cash at close since the bank is lending on 80% of appraised value which is lower than what the accepted offer noted in the contract states

3. Over value – all moves forward with loan as committed on the credit approval and you are an urban legend!

Net it Out for Me!

For this exercise, let’s use a $2M accepted offer, purchase contract price with 20% down. The scenarios below show an appraisal coming in “At Value” which means it appraised at $2M and the other scenarios shows coming in “Under Value” which means it appraised less than the $2M accepted offer, purchase contract price.  

Scenario A – Appraisal comes in “At Value” (equal to the accepted offer amount)

• Accepted Offer Amount: $2M

• Appraised Value: $2M

• Loan Amount: $1.6M

• Down Payment: $400K

Scenario B – Appraisal comes in “Under Value” (less than the accepted offer amount)

• Accepted Offer Amount: $2M

• Appraised Value: $1.9M

• Loan Amount: $1.52M

• Down Payment: $480K

The difference from scenario A to B is you would have to come up with $80K out of pocket to make up the delta in the appraisal price vs. the accepted offer amount.  Now remember, this is uncommon in today’s market that an appraisal would not come in at value (the offer price).  However, I like to provide my clients with as much information as possible so they can make informed decisions and weigh risk to their tolerance level.

Local is Better

As you can see, the appraisal is critical to the home loan which is another reason to work with a lender that is familiar with our local market and has a proven track record of closing loans in this fast-moving market.  Lenders that are familiar with the local market work with partners that are familiar with the area.  This is important as the local lender works with appraisers that are also local so the appraiser will be very well versed on local comps.  As opposed to working with a lender who is out of the area and who may not work with local appraisers familiar with our unique and fast-moving market.

You Need to Be Prepared for This Market!

The better prepared you are as a buyer is to tackle the intense and at times insane San Francisco and Bay area real estate market the more seamless and effective your experience will be!  

I Help with That!

Comment below and let me know what your questions or concerns are and what topics you’d like to see me address. I’m here to guide you with a proven framework for helping buyers secure a home in the competitive San Francisco and Bay Area Real Estate Market.