Are You Giving Up Too Much to Get into That New House?
In this real estate market, people will do just about anything to make their home offers stand out.
This includes waiving some important contingencies. Recently, with the onslaught of potential buyers and historically low inventory, competition for homes has been fierce. This has led some potential buyers to forgo home inspections and make big concessions on the home appraisal.
Before signing away your right to these two steps in the home-buying process, make sure you understand exactly what they are, why they’re important, and how they can potentially save you a lot of time and money in the long run.
What Is a Home Appraisal?
A home appraisal is a report completed by a qualified neutral third party. It produces an estimate of that home’s current value.
This is important for several key reasons:
One, it lets you know if you are overpaying for a property. Granted, this is somewhat subjective. A home is, ultimately, worth what someone is willing to pay for it. However, it gives you a sense of whether you’re in the ballpark.
Two, it’s a critical document for your mortgage lender. A mortgage is a secured loan, meaning your home is collateral if you ever default on the terms of your payments (i.e., the lender gets the house if you can’t pay the mortgage). For that reason, a lender will not give you more money than the house is worth, and the lender uses the appraisal to determine that value.
When a bidding war breaks out for a house, the offers can surpass what any neutral appraiser would value that home. This difference between what a buyer is willing to pay and the assessed value of the home is known as the “appraisal gap.” In a sellers’ market (hint: we’re in one now!), it’s not uncommon for a buyer to have to make up that appraisal gap in cash.
Bidding wars got you like…
Your ability to meet this demand depends on the amount of the appraisal gap, how much liquid cash you have, and how much of that you’re willing to spend during the home-buying process.
What Is a Home Inspection?
A home inspection, much like an appraisal, is conducted by a neutral third party. It’s an impartial report of the home’s current condition. The American Society of Home Inspectors puts the importance of the home inspection into perspective:
“Home inspections are the opportunity to discover major defects that were not apparent at a buyer’s showing…Your home inspection is to help you make an informed decision about the house, including its condition.”
A home inspection can reveal any number of issues that could be costly, should you take possession of the home:
- Failing roof
- Aging or malfunctioning HVAC system or other major appliance
- Water damage
- Mold
- Leaky plumbing
- Unstable or deteriorating foundation
You reading your home inspection results.
With a home inspection report in hand, you not only know the problems of the home (avoiding an unpleasant and potentially costly surprise down the line), but you can also possibly negotiate with the home seller about anything revealed in the report.
The willingness of the seller to negotiate will depend on the terms of the other home offers received. If the seller is amenable, you can ask for the issues to be repaired, or you could receive a credit or price reduction to offset payment for those problems after you move in.
Feeling unsure about how best to approach this situation? The negotiation phase is one of the most important jobs of your real estate agent. He or she should help you navigate this entire process.
Waiving your right to a home inspection is possible but not usually advisable. Yes, it would make your offer much more enticing to a seller, but in the case of major structural or foundation issues, it could mean tens of thousands of dollars in repair work.
Conclusion
Buying a home is a major decision, and it can change your financial future for the better. Owning a home, however, means you’re responsible for the expenses related to that home. Contingencies in the home-buying process are there to protect you, giving you unbiased views about that home’s current condition and value. You should think carefully before giving them up.
If you have questions about this or anything related to real estate, don’t hesitate to reach out! We’re here to show you real estate as it should be!
