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As New York City apartment owners flee for the suburbs and face increasingly fierce competition purchasing houses there, a new trend is emerging: More buyers are waiving appraisal and inspection contingencies to give themselves an edge over other bidders.
Contingencies in home buying contracts allow the buyer a way out should there be unexpected issues with financing or defects in the property. Appraisal contingencies protect buyers in the event that the house is appraised for less than its sales price. Mortgage lenders use appraisals to calculate the size of the loan they'll give buyers, so if the bank's appraisal falls short, the contingency lets the buyer cancel the contract rather than make up the difference in cost themselves.
"If the space is overpriced, the buyer has an out of the contract or could try to renegotiate the price," says Michael Feldman, a partner and manager in Romer Debbas’ residential real estate department. "This protects the buyer from having to come in with additional cash if the space under-appraises."
Given the possibility that they'd have to put up cash to make up for a shortfall, why would buyers choose to waive this contingency?
"When the market heats up and there isn't enough supply to satiate demand, various contingencies are thrown out the door," explains Jonathan Miller, president and CEO of appraisal firm Miller Samuel.
This is increasingly the case in many NYC suburbs, which are benefiting from a release of pent-up demand after the market was put on hold because of the coronavirus outbreak. Particularly at the high end, these regions are benefiting from an exodus of buyers from the city, who are seeking more space and security after months of lockdown.
"In Long Island, Westchester, and Fairfield County, as you move higher in price, activity is increasing," Miller says. "The higher end of the suburbs had been dormant since the financial crisis, and this pivot has a lot to do with outbound movement from Manhattan."
With the increase in demand comes an increase in pricing, but with few comps on the market to support the higher pricing, these suburban properties could end up being appraised for less than their asking prices, Feldman says. In fact, the National Association of Realtors found that in June, 9 percent of contract terminations were due to appraisal issues, up from 3 percent in April, Money reported.
Still, more buyers are willing to waive appraisal contingencies to stand out in a bidding war.
"It gives you an edge if you waive it," Feldman says. "Compared to a fully mortgage contingent buyer, waiving is more desirable, because from the seller's point of view, they have more certainty the deal is going to get done no matter where it appraises."
This also applies to buyers who waive the inspection contingency, which allows buyers to renege on contracts or negotiate with sellers if an inspection turns up issues that require repairs. But even if you're planning to waive this contingency, you should still have the property inspected, Feldman advises, so that you're fully informed about what to expect upon moving in.
Not all buyers can afford to take these kinds of chances with contracts.
"Waiving contingencies is not for people who can barely squeak by, because they have to be prepared to come up with more cash. On the other hand, all parties being equal, it makes them stand out," Miller says.
And even if you think you can swing unexpected expenses resulting from an under-appraisal or inspection issues, make sure to work with a broker who has done a thorough market analysis and can help advise you.
"Listen to your broker in terms of how qualified the seller is," Miller says. "Just because you're offering and it sounds better to have no contingencies, the seller might have reservations if financially it's a stretch."
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