BUYER BEWARE - LENDERS DON'T CARE !
Appraisal waivers, while potentially expediting the loan process and saving costs, can pose significant risks to the financial system, particularly due to the potential for inaccurate valuations and the risk of "data cancer" in the real estate market. This is because they rely on automated valuation models (AVMs) which may not accurately reflect the true value of a property, especially when there are issues not easily detectable by algorithms.
Here's a more detailed breakdown of the potential dangers:
1. Inaccurate Valuation and Overpaying:
AVMs vs. Human Appraisal:
AVMs, which are software-based models, rely on data like recent sales and property characteristics, but they may not be able to account for unique features, structural issues, or local market nuances that a human appraiser would identify.
Overpaying:
When an appraisal is waived, buyers risk overpaying for a property if the AVM underestimates its value, potentially leading to difficulties with future sales or refinancing.
2. "Data Cancer" and Market Distortions:
Compounding Errors:
When AVMs are used extensively, especially for appraisal waivers, flawed or incomplete data can be incorporated into the system, leading to a gradual distortion of market trends and valuations.
Overvaluation Bubbles:
Repeated reliance on AVM-generated values can create overvaluation bubbles in certain markets, making properties appear more expensive than they are.
3. Risk for Lenders and Buyers:
Lender Risk:
Lenders may face risks if the property's value is miscalculated, potentially leading to loan defaults and losses, especially when appraisals are not a requirement, according to the Appraisal Institute (AI).
Buyer Risk:
Buyers who waive appraisals and pay based on AVMs can face financial hardship if the property's true value is lower than the agreed-upon price.
4. Other Potential Issues:
Missed Issues:
A human appraiser can identify issues that AVMs might not catch, such as structural problems or outdated systems, which can lead to costly repairs down the line.
Impact on Refinancing:
Overpaying for a property can make it difficult to refinance later, as lenders often require a certain percentage of equity before granting a new mortgage.
"Gaming the System":
Unscrupulous parties may exploit the system by using appraisal waivers to inflate prices or hide property defects.
In conclusion, while appraisal waivers can offer some benefits, they also carry significant risks to the financial system, including the potential for inaccurate valuations, market distortions, and financial hardship for both buyers and lenders.
NEW NORMAL:
Buyers get a home inspection and appraisal when purchasing a home!
NO consumer protection with appraisals being waived!
WAIVERS BENEFIT THE LENDER NOT THE BUYER!
Appraisal Waiver Pros and Cons
Pros?
Here are the main benefits of appraisal waiver is for the lender:
1. Saves Time
Appraisal waiver can save you several days or weeks by eliminating that long process.
2. Reduces Costs
Appraisal waiver can save you professional appraisal cost which ranges from $300 and $600.
3. Avoids Appraisal Delays
In high-demand real estate markets, appraisers can be difficult to obtain and therefore, delay the process. An appraisal waiver eliminates this issue.
4. Removes the Risk of Low Appraisals
There’s a risk that professional appraisers sometimes value a home lower than expected, which affects the loan terms and may cause the deal to break. An appraisal waiver removes this risk.
5. Simplifies the Refinancing Process
An appraisal waiver simplifies the refinancing process of a mortgage for homeowners by making the process quick, smooth, and reducing paperwork.
Cons!
Here’s what to consider regarding appraisal waiver:
1. Inaccurate Property Valuation
As automated systems rely on past data, valuation might not match with current market conditions. In such a scenario, appraisal could be either overvalued or undervalued.
2. Limited Availability
One of the issues with appraisal waiver is that your property might not qualify for waiver. If your home is unique, newly constructed, or in a volatile market, you may not receive a waiver.
3. Higher Risk for Lenders & Buyers
As automated systems can overestimate property so there’s more risk for lenders to take. This could impact mortgage approval rates.
4. Issues in Volatile Markets
In volatile markets, home values keep changing. So, if a buyer pays more than the real market value, they might end up overpaying for the property.
5. Fraud and Corruption!