The Risks Of Waiving Your Home Appraisal

Considering Waiving Your Home Appraisal? Think Again.

Did you know that with some home purchases you now have the option of waiving your home appraisal? Crazy, huh?

Four Reasons Why Waiving Your Home Appraisal Is A Bad Idea

Fannie Mae recently introduced Appraisal Waivers to some home buyers under some specific conditions. You can look up those conditions on the Fannie Mae website since I don’t want to waste any time with the specifics here.

What I do want to discuss are the ramifications of choosing a waiver. Is it a good idea? I’ll let you decide after we look at some of the negative consequences of getting a waiver.

Some people that only look at the cost of the appraisal might think that this is a good idea. What they don’t consider is the value that the appraisal provides to them. Today I’m going to share practical reasons why you should never skip the appraisal when purchasing a home.

Closing costs can vary on a home loan but the appraisal fee is typically less than 1% of the price of the home and less than 10% of the buyers overall closing costs on average for a $300,000 home. That’s not too bad considering the peace of mind that the appraisal can give you.

Can you imagine skipping on the home inspection or title insurance? Probably not and the appraisal is no different.

Four Reasons Why Waiving Your Home Appraisal Is A Bad Idea

Let’s take a look at the top reasons that you should never skip the appraisal when purchasing a home.

1) The bank valuation is not the same as an independent appraisal- If the bank issues an appraisal waiver they will still get some kind of valuation using their own Automated Valuation Model (AVM). Their AVM could best be described as a Zillow Zestimate type of guess at the value of the property.

One thing you should keep in mind is that the bank’s valuation is not the same as an independent appraisal. Their valuation will satisfy their bank regulations and is for their own internal use.

It helps them to manage their loan portfolios and is not intended for you the borrower.

2) You won’t be able to write an appraisal contingency into your contract- If you are interested in including an appraisal contingency in your contract you will not be able to use the banks, because as I said it is not a true appraisal so you will not be able to rely on their tool to help you make a purchase decision.

3) You won’t know the accurate square footage of your home- The bank valuation will not include a floor plan sketch so you will not know the exact square footage. Most agents price homes using price per square foot but if they have incorrect square footage they may not price the home accurately.

Without a traditional appraisal, you will never know the exact square footage or if the home is overpriced. This could result in overpaying for the property and possibly being upside down in your mortgage.

4) You contribute to dirty data for future home buyers- What is dirty data? Dirty data in the context of real estate involves using comparable sales data in CMA’s or appraisals that may not reflect true market value.

If a property sells for more than true market value and it qualifies for a waiver the high sale will not be brought to anyone’s attention. If this “high” sale is used as a comp in the future it may inadvertently skew future sales to the high end. This may create a false appreciation of property values.

As you can see, on the one hand, there are numerous negative consequences when getting appraisal waivers. On the other hand, utilizing an appraisal that is performed by a certified appraiser who visits the home to measure and observe its condition and quality will give you the most accurate valuation that will allow you to make an informed decision.

The sale will also help contribute to accurate and reliable data that can be used in the future to help buyers and sellers.

Question

Do you have anything to add? If you have any other questions about the risks of waiving your home appraisal feel free to contact me and as always thanks for reading.

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Comments

  1. Very well stated Tom. Excellent insight, as usual. An appraisal continues to be the much-needed equalizer in such highly emotional transactions. Buyers and Sellers typically are at a heightened state of emotional decision making… Sellers remember each coat of paint on the walls and all the intensive labor they have put into their property over the years… in their mind, this equates to greater worth.

    Prudent, experienced lenders continue to obtain appraisals even when a waiver is being offered (this is verified by Fannie Mae on a video that was published within the last year — check the website). Fannie Mae offers many more waivers than is actually taken in the lending community (watch the video and see the statistics ).

    All in all, it is the public that ultimately suffers when an appraisal is not performed. Appraiser licensing boards should be keeping this on their radar …. after all, they are tasked with maintaining public trust. A task, I may say, they take very seriously.

    • Thanks, Melissa. I agree with your comments. It’s good to know that not all lenders are going with the waivers even when the property is approved for one.

  2. Thanks Tom. I’m really concerned about “dirty data” as you mention. On one hand if something sells really high it should be an outlier and not sway the market. Yet if something sells a few percent too high, I do wonder if it will have some power to pull up the market – especially if there are a series of these sales that become “comps” to a new AVM.

    • Great questions, Ryan. The real concern here is that if waivers become prevalent and the trend of slightly higher sales continue for these types of sale then it could indeed adversely affect the market. This is one of the many reasons that it is important for a live person to be involved in the appraisal. AVM’s don’t verify sales to determine if they had a waiver so it may see these types of sales as okay to use, which they may be, but then again they may not truly reflect market value. I think it is important going forward that local MLS’s recognize these types of sales and make a searchable field on their search criteria so that those trying to analyze sales can see if these types of sales tend to be higher than the ones with a full appraisal.

  3. Well written! Thank you Tom!

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