What Liability Does an Agent Have When an Appraisal is Waived?
“Buyer shall have the right to conduct inspections, investigations, tests, surveys, and other studies at the Buyer’s expense. Buyer is strongly advised to exercise these rights…”
This (or a version of it) is language we, as appraisers, are all familiar with. For those of us who do lender valuation work, we see a lot of purchase sale contracts and this kind of language is quite common. Why is it in there, however? What does a home inspection have to do with the actual contract between a buyer and a seller of a home? Isn’t it up to the buyer to just know that a home inspection is a good idea? The answer is complicated, but yes and no. Most buyers are savvy enough to understand the benefits of a home inspection. Listing agents and sellers are also savvy. They are wise enough to include similar language to the above as a “CYA” (ahem, cover your assets) to their roles.
In preparation for this article, I did a very unscientific poll of four of my real estate agent friends and asked them the same question: “Would you ever consider omitting the ‘we encourage you to get a home inspection’ paragraph from your sales contract?” Answers ranged from “Is this a joke?” to “Do I look stupid?” Of the four agents I asked, not one of them would ever consider removing such language. Why? It all comes down to liability.
“But, what if it is pretty obvious that the home is in good shape,” I followed up, “and no repairs are obvious? Would that change your mind?”
“That’s just the point,” answered one of the agents, “repairs are not always obvious, and I do not want to be blamed for a problem down the road.” With something as big as a home purchase, there is just too much at stake.
The fact is, not all buyers choose to have a home inspection done prior to a purchase. However, the mere fact that the agent has a written record (signed by both parties, I might add) encouraging them to get one is a huge risk relief to the agent.
What is the purpose of an appraisal? Typically, at least where a mortgage is involved, it is ordered by the lender; they are the client. Why? Asset protection; security. The lender of the money wants to be relatively certain that, should the loan go into default, there is enough value there to resell the property and recoup at least a good portion of the outlay.
There is another reason for the appraisal process though. Here is another paragraph from the same sales contract as above:
“If an appraisal is required by the lender, the property must appraise at no less than purchase price or the Buyer’s Earnest Money shall be returned at the Buyer’s request unless Seller, at Seller’s sole discretion, agrees to reduce the purchase price to meet the appraised value.”
Not only does an appraisal go a long way to directly protect the lender from loaning too much on a loan, it indirectly can be a protection for the potential buyer from purchasing a home that is not worth the price that has been agreed to. There is a growing trend in the lending world of property inspection waivers (a misnomer for ‘appraisal waiver’) and less than full appraisals. It is not completely uncommon to have a home on the market, a potential buyer makes an offer, and the lender waive the appraisal (or get something less than a full appraisal).
Great, right? Nope! Such a scenario puts both the lender and the buyer at risk. It also puts the agent at risk. Let me give you a hypothetical situation to illustrate the point. Let’s say that a potential buyer puts an offer on a house, a waiver is issued, and later the buyer finds out the home was overpriced. They cannot refinance for even what they owe or cannot resell (even though the market has been steady or increasing). What now? Is there some liability on the shoulders of the agent at that point?
There is a simple solution to the budding problem, and it is found in the same language most agents put in their sales contracts for inspection encouragement. Due to the changing world of appraisal waivers, and less than full appraisal products, all sales contracts should have language similar to the following:
“Buyer shall have the right to conduct an appraisal at the Buyer’s expense. Buyer is strongly advised to exercise these rights whether or not an appraisal is ordered by the lender.”
If a potential buyer is willing to spend $300-$500 for a home inspection, why wouldn’t they want to spend a similar amount for an appraisal? I believe they would, and it is only prudent that agents begin incorporating this language into their contracts as well as their oral encouragements to the potential buyers.
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