Highly Competitive Market Is Resulting in Appraisal and Inspection Waivers on Contract Contingencies
A home warranty can be a cost-mitigation tool.
According to REALTORS®, sellers are wary of the appraisal and inspection process. In addition, REALTORS® has reported that buyers who make an offer using FHA or VA financing find it hard to compete against other buyers who are offering cash or using conventional financing.
Appraisals present a hurdle for homebuyers with VA and FHA financing when prices are rising fast and homes are selling swiftly with little inventory on the market.
In May 2021, the median existing-home sales price rose at a record high of 24% year-over-year, the highest annual pace since 1969(1). VA appraisals take anywhere from 5 to 15 days (2), but properties are typically on the market for 17 days.
Homebuyers are waiving appraisals to close the transaction quickly. REALTORS® reported that among contract contingencies waived by the buyers, buyers' most common contingency was the appraisal contingency (28%) followed by the inspection contingency (25%).
While inspection standards are important for ensuring that buyers are protected, they can create a disadvantage for prospective homebuyers in a highly competitive housing market. First-time homebuyers, buyers with less than excellent credit scores (FHA borrowers can have a credit score of as low as 580), and low-income and low-asset borrowers who are not able to afford a 20% down payment are most likely to get disadvantaged.
A home is the largest investment most people make in their lifetime. Buyers should be protected so that the price paid for the home is worth its value. Unfortunately, in a housing market where sales are moving swiftly, the time to undertake the inspection and appraisal is creating a hurdle for buyers obtaining FHA-insured loans who are typically first-time buyers and buyers obtaining VA-guaranteed loans. (3)
(1) NAR started tracking single-family existing home sales since 1969 and total existing-home sales (single-family and condos/coops) since 1999. Single-family home sales make up 88% of existing-home sales in May 2021.
(2) VA Appraisal Fees and Timeline Schedules, https://www.benefits.va.gov/HOMELOANS/appraiser_fee_schedule.asp
(3) https://www.nar.realtor/blogs/economists-outlook/more-homebuyers-making-20-down-payments-and-waiving-appraisal-and-inspection-contract-contingencies?AdobeAnalytics=ed_rid%3D7022507%26om_mid%3D4831%7CMembersEdgeNews_2021_07_01_Agents%26om_ntype%3DMEMBER%27S%20EDGE%20(news)