Appraisal Guarantees and Appraisal Waivers

~ By Mike Galinac, Exact Match Properties ~

In my previous post, I briefly touched on the concept of including an “appraisal guarantee” with your offer, which is not the same as an “appraisal waiver”, even though these two terms get thrown around as if they’re interchangeable. I’ll explain the difference.

If your real estate offer is subject to mortgage financing, there’s a better than good chance that the lender will require an appraisal, to determine whether the sales price is in line and to establish the value in which the mortgage amount will be based on. If you agreed to pay $225,000 for the home, subject to financing 95%, and the appraised value only comes in at $200,000, your lender is only going to allow you to borrow 95% of $200,000, not $225,000. If your offer did not include any kind of appraisal guarantee or waiver in the above scenario, you would have to do one of the following:

1. Agree to add $25,000 to your down payment, over and above the initial 5% that you planned to put down.
2. Get the seller to agree to lower the price by $25,000.
3. Negotiate with the seller some combination of adding to your down payment and a price reduction.
4. Cancel the agreement and find another home.

You may be asking, “Can’t we just get another appraisal done?” The answer is probably not unless you change lenders and start from scratch. If you’re using FHA financing, switching lenders may still require that the previous appraisal be used. 

In order to compete in the fast-paced Michigan real estate market, any offers that are over the asking price and include mortgage financing, better include one of the following:

Appraisal Guarantee – You agree to add up to a specific amount of money to your down payment, should the appraised value come in less than the agree upon sales price. This allows your final sales price to exceed the appraised value and gives the seller reassurance that they will end up in a better position. This method caps the amount of money that you could potentially have to add to your down payment.

Appraisal Waiver – You agree that regardless of the appraised value, you will add enough additional money to your down payment to allow the deal to close at the agreed upon sales price. This is certainly the preferred approach from the seller’s point of view, but much riskier for the buyer. Please be sure to exercise extreme caution when considering this as an incentive to the seller.

It’s important to note that every situation is different, with different homes, different people, different priorities and different challenges. Therefore, it’s extremely important that your real estate agent is highly skilled and very experienced, to give you the best possible chance to succeed. My team and I, here at Exact Match Properties, are ready to assist you, should you need effective representation. Please don’t hesitate to contact us for a no-obligation consultation.  Thank you! Mike Galinac