Home Buying

What’s an ‘appraisal waiver,’ and should home buyers skip it to compete?

‘It’s an assurance to the seller that the buyer is going to move ahead no matter what.’

Appraisal gaps occur when a home appraises for less than the agreed-upon purchase price.

By Robyn A. Friedman -- Globe Correspondent

July 5, 2023

Despite slower sales in May, the Greater Boston housing market remains competitive. According to the Greater Boston Association of Realtors, despite fewer sales due to a lack of inventory, median sales prices in May reached a record high of $900,000 for single-family homes and $726,002 for condominiums.

“In the city, it’s not nearly as competitive as the suburbs,” said Ryan J. Glass, vice president of Gibson Sotheby’s International Realty in Boston. “The suburbs are absolutely insane, with people waiving contingencies, including the appraisal gap.”

Appraisal gaps occur when a home appraises for less than the agreed-upon purchase price. It’s the difference between the purchase price and the appraised value of the home and most often occurs in markets where home sales prices are rising rapidly, commonly due to bidding wars.

While real estate agents refer to “appraisal contingencies,” however, there’s really no such thing in a home sales contract.

“It’s not a waiver of the appraisal — it’s more of a willingness to cover the difference between the agreed-upon price and a low appraisal value,” said Hillery Dorner, a real estate attorney with Dorner Law & Title Services in Concord. “It’s an assurance to the seller that the buyer is going to move ahead no matter what.”

Waiving the appraisal gap shifts a huge amount of risk onto the buyer, so Dorner caps the buyer’s liability when she negotiates a contract. “We will set a bottom limit so they’re not paying $500,000 for a house that’s worth $200,000,” she said.

Of course, a buyer’s ability to get a mortgage rests on a satisfactory appraisal. So, if a home doesn’t appraise for the contract price, that could affect the ability of the borrower to qualify.

Bill Banfield, executive vice president of capital markets for Rocket Mortgage in Detroit, said that when lenders determine the maximum amount they will lend, they look to the lower of the purchase price or the home’s appraised value.

For example, for a buyer putting 3 percent down on a home and financing 97 percent, the maximum amount of the loan on a $215,000 home would be $208,550, Banfield said. But if the appraisal came in at $200,000, the lender would finance only $194,000, or 97 percent of the appraised value. If the buyer waived the appraisal gap, that means they would have to come up with the additional $21,000 cash to close, rather than the $6,450 originally anticipated.

Buyers with sufficient cash reserves can simply move ahead with the deal, but those who lack the additional money to close may need to back out of the deal and face the loss of their earnest money deposit.

“Buyers usually give a 5 percent deposit, which is a lot of money with Massachusetts home prices,” Glass said. “A lot of buyers waive their appraisal without fully understanding they could lose their deposit, and not all agents do a good job explaining that.”

Waiving the appraisal gap can be a great tool to incentivize sellers to accept an offer, said Ben Aiken, a real estate agent with The Agency in Boston. “For sellers, it’s great,” he said. “Sellers want to have the cleanest contract possible, and appraisal gap waivers show that the buyer is committed to close the deal.”

But those considering waiving the appraisal gap should do their due diligence upfront so they know what the fair market value of the home is. “Check Zillow and tax assessments, and your broker can help you with comps,” Dorner said. “Then look at your finances to make sure you actually have the cash.”

Robyn A. Friedman has been writing about real estate and the home market for more than two decades. Follow her @robynafriedman. Send comments to [email protected].