Buying a home today looks very different than it did a year or two ago. Back then, if a buyer had a budget of $500,000, they would look at homes up to $525,000 or even $550,000, knowing there was probably room to negotiate.
Today, that same buyer will be looking at homes in the range of $450,000 to $475,000, knowing they are going to have to bid above the list price to compete with multiple offers. The highest price doesn’t necessarily guarantee the winning bid – buyers have to have the highest and the best offer.
While cash is still king, financed buyers are removing some of the contingencies to make their financed offers more appealing and competitive with cash offers.
The top two concessions buyers are adding to their offers are 1) purchasing the home as-is and 2) waiving the appraisal contingency. While these might be attractive to the seller, there is risk to the buyer.
As-Is
Once the offer is accepted, the 10-day inspection period (or the time period agreed to on the contract) begins. This is when the buyer has the opportunity to do their due diligence on the property and have the home inspected.
Purchasing as-is means the buyer will not ask the seller to make any repairs, even after the inspection is done. This is a huge benefit to the seller as they don’t have the expense or, more importantly, the hassle of finding contractors and scheduling repairs.
Purchasing as-is does not mean the buyer has to waive the inspection itself or agree to purchase the home no matter what is found during the inspection. The inspection period is for the buyer to do their due diligence and find out about the home.
It is important to have an inspection even if buying as-is, so the condition of the property can be evaluated before moving forward. If it does need a lot more repairs than expected, the buyer can cancel the contract and get their earnest deposit back – so long as the cancellation happens before the end of the inspection period.
As-is is a huge benefit to the seller and, it can really make a buyer’s offer stand out in this competitive market.
Appraisal Waiver
A lot of people are talking about waiving the appraisal contingencies right now and this is a term that financed buyers are using to make their offers more competitive. But what exactly does this mean?
All lenders require an appraisal of the property to ensure the current market value is not lower than the purchase price. If the appraisal comes in below the purchase price, the buyer can cancel the contract or, as most often happens, negotiate. When the appraisal is lower than the purchase price, the buyer and seller can mutually agree to split the difference or reduce the purchase price to the appraised value, but this is not common in today’s hot market.
In today’s market, sellers often receive multiple offers, and the list price is often bid up tens of thousands of dollars. In a market where prices are moving up so quickly, appraisals cannot keep up with the higher prices as there are no comps to support them. As a result, many appraisals are coming in below the purchase price.
While sellers love to see offers above the list price, the over list offers really don’t mean anything if the property can’t appraise for the purchase price.
For example, take a home listed for $500,000 that sells for $580,000. If the appraisal comes in at $550,000, the lender will only loan based on the $550,000 value, and if the buyer has waived the appraisal, they will have to make up the $30,000 difference between the sales price and the appraised value with additional funds. If the property appraised at $500,000, then a buyer would have to contribute an additional $80,000 in cash – and this is on top of the down payment. This is a big risk!
Waiving the appraisal is a great way for a buyer to strengthen their offer, but it comes with a risk that buyers need to understand. This is not a workable term for every buyer.
In this fast-moving market, be sure your Realtor can give you expert advice and educate you about the risks you may be taking. If you have any questions about buying or selling in today’s market, please do not hesitate to contact me. I have the experience and many other tools in my toolbox to help you win your offer and find your next home!
Lorraine is a Multi-Million Dollar producing agent, has been a full-time Realtor for over 13 years, is an Associate Broker of KOR Properties, a Certified Negotiation Specialist, and is on the Professional Standards Board. You can reach Lorraine at (602) 571-6799.