August 10, 2024
7:51 am

What is Appraisal Contingency in Real Estate?

When preparing an offer to purchase a home, contingencies are vital for providing financial safeguards to buyers in case the transaction encounters unexpected issues. Among the most frequently included contingencies for residential home buyers are appraisal contingencies, alongside financing and inspection contingencies.

What is an Appraisal Contingency?

The appraisal contingency stipulates the house must be appraised at the sale price or higher, which will help you secure a mortgage. Depending on the agreement, this contingency could also include a provision that the sale price will be reduced to the appraised value if the appraisal is lower.

If these conditions aren’t met within a specified time frame, the deal is off, and you are entitled to a refund of your deposit or earnest money. Depending on the contract, you might also be entitled to additional money for your trouble, which is why an appraisal contingency is important for buyers’.

How Does The Contingency Work?

During the loan application process, your lender orders an appraisal of the home you want to buy. A licensed home appraiser then examines the house and its surroundings.

The appraiser will provide a professional opinion of the home’s value. Lenders require an appraisal to ensure that the house is not being sold for more than it is worth.

If the appraisal comes in lower than your offer, you may want to ask the seller to lower the sale price, come up with the cash to cover the difference between your offer and the appraisal or terminate the sale.

If you have an appraisal contingency, you’ll be in a stronger negotiating position with the seller. Without one, you might be unable to walk away from the sale without losing your earnest money. Therefore, not having an appraisal contingency only increases your risks.

Can an appraisal contingency be waived?

While your lender will likely require an appraisal, you can choose to waive an appraisal contingency but it is risky. By waiving the contingency, you’re committing to purchasing the property at the agreed-upon price, regardless of the appraisal outcome. That means you may need to make up the difference between the appraised value and the sale price in cash. This strategy is more common in competitive markets where you are confident in the property’s value and want your offer to stand out.

Let’s explore how having or waiving an appraisal can affect your real estate decisions:

What happens if the appraisal is lower than the sale price

With an appraisal contingency: With an appraisal contingency in place, you have a few options. First, you can simply walk away from the deal, earnest money in hand. Or, you can work with the seller to renegotiate the purchase price to more accurately reflect the appraised value. Finally, you could choose to pay the difference between the appraisal amount and the sale price, effectively increasing your down payment to appease your lender.
Without an appraisal contingency: Without an appraisal contingency, your loan may be denied unless you increase your down payment amount. If you can’t or don’t want to bring more cash to closing, you will need to walk away from the sale, forfeiting your earnest money.

What happens if the appraisal is higher than the sale price

With an appraisal contingency: If your appraisal comes in above the sale price, this is good news for the buyer. You’ll have instant equity when you move in! In other words, your home will almost immediately be worth more than you paid for it, giving you the financial flexibility to resell or refinance as needed.
Without an appraisal contingency: A high appraisal is especially good news for buyers without an appraisal contingency. This means your purchase can move forward without needing to bring extra cash to closing.

Benefits of including an appraisal contingency

For buyers, there are a lot of reasons why it makes sense to include an appraisal contingency with your offer.

Financial protection: With an appraisal contingency in place, you have peace of mind in knowing that you won’t be obligated to buy an overpriced home.
Negotiating power: An appraisal contingency allows you to renegotiate the terms of the purchase based on the results of the appraisal.
Flexibility to walk away: An appraisal contingency ensures you can get your earnest money back and abandon the deal if the appraisal doesn’t align with the purchase price.

In the majority of scenarios, and especially for first-time homebuyers, an appraisal contingency is invaluable because it allows you to back out of a deal while minimizing impacts to your finances. The appraisal contingency clause can help protect your finances if you find the home of your dreams and want to make an offer. This clause allows you to pay for an appraisal if the sale falls through, preventing losses.

If the home appraises for less than the agreed-upon sale price, you can ask the seller to lower the cost, offer more money for the house, or walk away from the sale altogether.

Apex Group is a highly privileged company that has been remarkably remodeling the luxuriant real estate management company since 2005. It is a renowned & trusted name that has been delivering meticulously iconic quality. services with the aim of making real estate business a more professional, efficient & growth-oriented.

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What is Appraisal Contingency in Real Estate?

What is an Appraisal Contingency?

How Does The Contingency Work?

Can an appraisal contingency be waived?

What happens if the appraisal is lower than the sale price

What happens if the appraisal is higher than the sale price

Benefits of including an appraisal contingency

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