The Appraisal Contingency
Why it's a good thing
The
appraisal of a property's value has become a regularly used residual
service by homebuyers in the real estate process. However, it can
become a tool that is tossed by the wayside in a hot market -- and
that's not very wise when it comes to the largest investment most
consumers will ever make.
The
appraisal serves various purposes in a transaction for several people.
It acts as a financial compass, as it were, for everyone that has a
monetary stake in the property value -- the seller, the buyer, the
lender, and the insurance company.
If you're looking to use
mortgage financing, it's hard to overlook an appraisal. Now, many
buyers, trying to compete with other purchasers, may waive the
appraisal contingency, but they will still have to have an appraisal to
get financing. It just means that once the appraisal is completed,
regardless of the final number, they will still walk toward the closing
table. In my humble opinion, this is like handing over a blank check to
the seller and telling him to just write whatever he wants for the
house and empty your bank account.
Don't throw caution to the wind
Why would you write a contract on a house for $440,000 when a
professional appraiser warrants that it's only worth $425,000? I've
never met anyone who would buy a car or invest in stock in such a
manner, but they'll throw all caution to the wind in the field of real
estate. It's become so prevalent in some markets that Realtors even
have a disclaimer form that they provide for buyers saying they have
been informed of the dangers of waiving the appraisal -- and yet,
buyers will sign it and move along.
The scenario usually works
something like this -- a house is placed on the market at $400,000 and
several offers come in immediately. Two require an appraisal, the
third, offering $420,000, does not, so the seller goes with it. In
addition, the contract has a $40,000 earnest money deposit. The lender
requires an appraisal before they will lend $380,000 to purchase the
house, and it comes in at only $400,000 -- revealing a $20,000 gap
between the contract price and the value (and $20,000 more than what
the lender is willing to provide to purchase the property).
Now, keep in mind, an
earnest money deposit is not the same as a down payment, though it can
be merged into the transaction as down payment money once the contract
is ratified. The earnest money deposit is submitted to the seller as a
means of saying, "We're really serious about buying this house." If the
transaction goes south, however, the seller could demand to keep either
a portion or all of the deposit if the buyer can't perform the contract.
Danger, danger!
That's
why waiving the appraisal is a dangerous way to buy a house. If all
goes well, then nothing bad happens. The buyer gets the house and
thinks all this disclaimer stuff and warnings are from a bunch of
nervous real estate agents who don't like to take risks.
But why don't you ask the
buyer who exercised this type of offer that went sour? They lost half
of their earnest money because the appraisal didn't come in high enough
for them to even get the financing and the seller demanded the earnest
money deposit to pay for the lost marketing time and the money he now
has to put out for more payments, insurance, etc., to put it back on
the market because the buyer wrote a contract he can't fulfill.
The result is either a
lawsuit (and we're not talking small claims court); trying to
renegotiate the sales price (good luck); moving forward by finding even
more money to pay for the inflated price agreed upon (which is usually
what happens); or taking the hit on your earnest money deposit and
finding another house -- except, now, with less money in your pocket
than what you had before.
If you wouldn't buy a
business or invest in stock without determining the true value of the
object of your purchase -- why would you purchase a house in such a
manner? It doesn't make sense and it can cost you tens of thousands of
dollars if your strategy fails. The road to homeownership is strewn
with the carnage of unwise strategies -- throwing away the appraisal is
one of them.
Filed under: Real Estate, Puerto Rico, selling, extra realty, bienes raices, warren, vendiendo., conprando, buying, contingency, appraisal, tasacion