Appraisal Waivers - Should you trust them? Yes...and No!

This week, I've had two transactions that both qualified for an appraisal waiver... in one case, the realtor agreed with the value and said the buyer should utilize it. In the other, the exact opposite...the realtor thought it was inflated by at least $50k.

First, what is an appraisal waiver? It's basically a finding from either Fannie Mae or Freddie Mac, specific to a home, a sale price, and a buyer's full credit/income/assets of a buyer. Lenders literally just plug all that info into a system, hit enter...wait for a few minutes, and see if the waiver came in. The price needs to be < $1.0m, and the buyer needs a minimum of a 10% down payment on a condo or single-family home.

I will say that the data pool that the agencies have is incredible. It's literally every appraisal on every house with every lender since 2012, swept into a massive database. They know about the home that sold and, more importantly, how each appraiser measured the comps to that property. If one appraiser said it was a dated kitchen and adjusted up to hit a value, while another called it upgraded...the conflict would cause a poor rating, and underwriting requests more info. Over time, appraisers have become a bit more...honest. Subjectivity is now challenged as a result of the data being aggregated.

So back to this story. The one house the realtor agreed was worth the price was in Rockville, MD. It was in a more cookie-cutter style area with quite a few recent sales in the past year. The property where the realtor thought it was overvalued was located in Columbia Heights, DC...an area with fewer transactions, and one where, within a mile or so, you clearly have home prices much, much higher.

Data is data; it doesn't have eyes and ears. It doesn't feel the energy of a market as a realtor does. It doesn't see whether the seller trashed the inside of the house, or the backyard was a disaster, or the neighbor's house is boarded up, etc. It pulls data from a sale or refinance of this house within the last 15 years, and then looks at recent sales of similar square footage properties within a mile or so, and gives a confidence score....NOT a value. Well, it is a value... but you shouldn't look at it that way.

An appraisal waiver should be a validation of what you and your realtor come up with as a fair market value for the home. It should NOT be viewed as THE value for that home. When markets are softening or declining, values always come in with real appraisals. Why? Because recent sales are higher, or at least the same. If the market is moving in a different direction, or that house needs some TLC, the price/value needs to reflect that. To be clear, the bots won't help you here!

Last note - if a property doesn't get a waiver, it also doesn't mean it's not worth that much. It could just mean they (Fannie/Freddie) do not like the risk profile of you buying that house at that price with that down payment. It also may just mean they don't have enough data...what if they've given a bunch of appraisal waivers recently, and they just need to build their data pool back up again? It's an intricate system. Use it for what it is, it's helpful when it exists, it's somewhat meaningless when it doesn't!