2021 had a˜go go’ spring real estate market.Buyers far outnumbered sellers and as a result, the limited inventory was in great demand, causing buyers to bid over the listing price on many homes.
Buyers pressured their real estate agents to get them a house. Faced with extreme competition, the realtors came up with techniques to get the offers of their buyers considered. This included waiver of the lender appraisal, and waiver of the home inspection. Both of these tactics are however dangerous.
A buyer whose purchase is contingent upon obtaining a mortgage commitment may cancel the contract of sale if unable to do so. Part of the mortgage approval is an appraisal. Generally the mortgage application will be denied if the home does not appraise for at least the contract price.
When a buyer waives the appraisal in full, the buyer makes herself responsible to pay the dollar amount of any under appraisal. By way of example, a bank will lend 80% of the appraised value. The contract price is $200,000.00. The property appraises for $180,000.00. Instead of the buyer having to come up with $40,000.00 toward the purchase price, she will now have to pay $56,000.00 since the bank will only lend 80% of the $180,000.00.
Sometimes buyers will hedge their bets by agreeing to pay up to a set amount of the under appraisal, such as $10,000.00. If the under appraisal exceeds that amount, then the buyer would be entitled to terminate the contract. In such cases, the buyers must ensure that they actually have this money in the bank and available.
Shifting gears, it is also unwise for the average buyer to waive their home inspection in order to get their contract offer noticed. An undiscovered leaking underground oil tank alone can cost upwards of $100,000.00 to properly address. Also, realtors and buyers are not qualified to determine whether a house is structurally sound, whether hidden wiring is up to code, whether a roof is beyond its useful life, and whether the plumbing needs to be replaced. The average homebuyer does not have an extra $20,000.00 to make unanticipated repairs after the closing.
The exception to my non-waiver advice is if the buyer is a professional seller or developer, who would have extensive expertise in evaluating building conditions.
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