Appraisal Contingency
What is the Appraisal Contingency?
A home appraisal is an assessment of the home’s true value, conducted by a licensed appraiser; the appraisal contingency is a clause in the purchase contract that allows the buyer to cancel the deal and keep their earnest money if the home appraises for less than the offer amount.
Why does the Appraisal Contingency matter?
The appraisal contingency financially protects the buyer (and their lender, if applicable) from overpaying for a home. Therefore, the home appraisal is required by a financed buyer’s lender to ensure that it is loaning an amount no greater than the value of the home.
In the case that the home does appraise for less than the offer amount, a lender likely will offer a lower loan amount; an obstacle for buyers relying on a loan to purchase. So, if the financed buyer is not comfortable paying the difference between the offer amount and the lower loan amount, the appraisal contingency protects their earnest money if they choose to exit the deal.
Cash buyers may also invoke the appraisal contingency if it is in the purchase agreement and the home appraises for less than the offer amount.
In both financed and cash purchases, if the home appraisal is low, the appraisal contingency can give the buyer room to renegotiate a lower sale price with the seller.
When should (and shouldn’t) a buyer include an Appraisal Contingency in their offer?
A buyer may consider waiving the appraisal contingency during a seller’s market. In competitive markets, sellers are more likely to choose offers without (appraisal) contingencies to increase the chances of a successful sale. So, if the buyer is set on the home and is either cash buying or comfortable paying the difference between the offer amount and a potentially lower loan amount, they may choose to waive the contingency to make their offer more competitive.
A buyer should not waive the appraisal contingency if they are a first-time buyer and less experienced with the purchase process, or if they are financing and the offer amount is at the top of their price range. In both of these scenarios, the appraisal contingency gives the buyer important financial protection.
