What it is:
A clause that allows buyers to back out of a deal if a home's appraised value is less than the sale price.
How it works:
A third party, usually hired by the buyer's lender, evaluates the fair-market value of the home to ensure that the home is worth the price and a lender isn't "over-paying" for a place.
This buyer protection is a great bargaining chip and can provide peace of mind for homebuyers during the appraisal process. Think of it as a “Get Out Of Jail Free” card to be used by the buyer to cancel the deal if the appraised value comes in at less than the agreed upon purchase price of the property.
Why is an appraisal contingency is important to you?
The appraisal contingency is a useful tool in a buyer’s arsenal to make sure you get your money’s worth. Lenders will usually base their loan amount on a percentage of the property’s appraised value, so this contingency can be helpful in protecting the buyer from losing any money in the event that the home is appraised for less than the offer amount.
What happens when the appraised value is below offer price?
If your home appraises for less than the offer price, the appraisal contingency allows you to veto the whole transaction – with no penalty or forfeiture of earnest money deposit.
If you still want to buy the home, someone must make up the difference. In the good old days, a seller might chip in or reduce the price of the property accordingly, if only to facilitate the sale. Nowadays, it is unlikely the seller will make up the shortfall, especially if he or she has multiple offers and a back-up offer to rely on. It is not uncommon for a seller to demand proof that a buyer has not only enough money available to cover the down payment and closing costs, but also some extra funds in case the appraisal comes in lower than expected.
It is imperative that the appraisal gets ordered immediately upon acceptance to avoid delays. A good rule of thumb is about 14 days, but it can vary from 5 to 21 days. Always consult your lender before shortening the appraisal contingency period.
Contingency appraisal: to waive or not to waive?
After 2012, most real estate markets became sellers’ markets, with sellers receiving multiple offers from which to pick and choose. Offers from buyers who had waived the appraisal contingency were shuffled to the top of the pile. Waiving the appraisal contingency showed sellers that a buyer was serious, and committed to buying the property, no matter what. Sellers love commitment!
In today’s competitive market, however, the majority of offers have this contingency waived, so any offer from a buyer without an appraisal contingency waiver can stick out like a sore thumb.
Whether to waive your appraisal contingency is a personal choice dependent on many factors and variables. If you have your heart set on a particular house you cannot live without, then you can increase your chances by waiving it. It could be helpful for you to discuss your appraisal contingency option with your bank or lender. The most important thing is that you understand what it means and how it affects your purchase.