Appraisal guarantees are where a buyer makes an offer where they guarantee, cash at closing, to pay above the appraisal amount, typically up to a certain # not to exceed the contract price, if the appraisal comes in below the contract price. In this article, I wanted to share more details.
Contracts are Strongest if They Include Waived Appraisals
From a seller's perspective, a contract is strongest if it doesn't even have an appraisal involved. In those cases, the seller doesn't have to worry about the appraisal holding back the timeline of closing, they don't have to worry about lender-required repairs, and they don't have to worry about the price coming in low.
No appraisal isn't uncommon with cash deals. It also can be done at times when the buyer is putting 20%+ down, especially if the buyer has great credit, the purchase would be a low debt-to-income ratio burden on them, the buyer otherwise has a good debt-to-income ratio, and the lending institution allows it.
Contracts are Stronger than Typical if They Include Above Appraisal Guarantees
While not as strong as a waived appraisal offer, a contract with a guarantee above appraisal can be key to winning some offers. In some cases, an offer can have a few elements that are inferior to another offer, such as price, lender, agent experience, and more, but a seller is won over by the appraisal guarantee being more than that provided by an otherwise superior offer.
Sellers Are Less Likely to Get Appraisal Guarantees if They Overprice Their Home.
A seller is much less likely to get appraisal guarantees if they overprice their home. The higher the volume of offers, the higher the probability that a seller will receive better appraisal guarantees. I've priced a home before with a number of offers that appraised at list price, and I was glad that we had a great appraisal guarantee that was used in its entirety up to the cap that was stated.
Caps on Appraisal Guarantees
While not always the case, it's typical for buyers to include caps on how much a buyer is willing to pay above appraisal up to the contract price.
Contract Differences on Appraisal Guarantees: VR vs REIN
Contracts can vary widely regarding appraisal guarantees.
With the Real Estate Information Network (REIN) Standard Purchase Agreement, there are built-in contractual appraisal caps based on purchase price for HUD, FHA, VA, conventional, or cash options as of 7/3/23:
Image courtesy REIN/Transaction Desk
With the Virginia Realtors® Residential Contract of Purchase, no appraisal cap is in place built into the contract for loans other than FHA, VA, & HUD. Because of that, unless a buyer states a cap within the contract, the buyer is saying that they have the ability, means, & willingness to pay an uncapped amount over the appraisal up to the contract price. The bottom of the VR contract is funny about copyright, asking for no duplication in whole or in part to be made, but a 4 year-old version is available here. Page 3 section 6 protects HUD, VA & FHA buyers from low appraisals.
Proof of Funds is Best Provided with Above Appraisal Guarantees
While it's typically best to have proof of funds for any down payment and closing cost needs, that's even more true when above appraisal guarantees are in place. I have seen where my buyer won a contract following the prior buyer on the same property being unable or unwilling to meet the above appraisal guarantee they made.
In addition to proof of funds being higher, a higher earnest money deposit is best with above appraisal guarantees, especially on a VA loan.
VA Appraisal Guarantees
I have been told that VA appraisal guarantees are not enforceable. That said, if a buyer knows that, and intentionally makes a guarantee that they don't have the means &/or desire to pay, then fails to pay it, it would be best to speak to an attorney, as doing so would appear on the surface to be fraud. Also, consider the negative ethical implications of such a statement. If you're a buyer with a VA appraisal, & trying to get out of paying an above appraisal guarantee, or a seller dealing with the same situation, it's a good idea to speak to an attorney on the subject.
What Happens if a Buyer Makes an Offer with No Above Appraisal Guarantee & Then the Property Appraises Low?
In these cases, contracts typically include the option for negotiations between buyer and seller. The buyer can come up to the contract price by paying the difference, the seller can come down to the appraisal, or buyer and seller can agree on something in between the 2. It's not unusual for a buyer to walk in the event that the seller isn't able &/or willing to come down to the appraised value in the absence of no above appraisal guarantee.