Understanding an Appraisal Contingency & How it Can Protect You

Buying a home is a lengthy process that comes with risks for both the buyer and the seller. There are several different types of contingency clauses that can be placed into a contract once you’ve made an offer on the home that you’re interested in. One such contingency is an appraisal contingency, which is designed to provide protection for the buyer while making sure that the property in question has a value that’s set to a minimum amount. In the event that the appraisal denotes that the property value is lower than the specified amount, it’s possible for the contract to be terminated without the buyer losing the earnest money that they’ve invested.

An appraisal contingency is important because the offer you make is tied to the mortgage loan that you seek. If the home is valued at a lower price than what you offered, it’s possible that the entire loan amount you requested won’t be approved. Keep in mind that the bank that’s providing you with a loan will require an appraisal report that displays the exact value of the home in question. With this report in hand, the lender will be better able to set a specific loan amount. An appraisal contingency could include different terms. For instance, the seller may be provided with the ability to reduce the sale price to match the amount of the appraisal. The following article takes a closer look at what an appraisal contingency is and how it can benefit the buyer.

Key Takeaways:

• An appraisal contingency can help protect both the buyers and sellers in different ways.
• They are extremely helpful when looking at loans and figuring out what the loan should be for the buyers.
• There are several things you can do if the home in question is appraised lower then the offer the potential buyer made on the home. Learn about these below!

Why Is an Appraisal Important?

A home appraisal is a process that’s designed to identify the exact value of the property that the buyer has made an offer on. The value that’s provided in the appraisal report will also tell the lender what the loan amount should be. When performing an appraisal, the expert in charge of the process will look at the flaws, features, and overall condition of the property to determine its value. The lender may not want to provide the buyer with the full loan amount that they request if the market value of the home is lower than the offer price.

Keep in mind that an appraisal differs from a home inspection. A home inspector is mainly focused on the quality of the home and how safe it is for people to live there. On the other hand, the point of an appraisal is to identify how much the home is actually worth. When an inspector provides you with a report, they oftentimes include suggestions on how to best enhance the condition of the home. The report that’s put together by an appraiser only denotes the value of the home in its current condition.

When to Waive an Appraisal Contingency

While appraisal contingencies can be highly beneficial for the buyer, there are specific times when you should consider waiving the contingency. However, the decision that you make depends largely on what your financial situation is. In the event that a finance contingency is placed within your contract, you won’t need to waive the contingency since the appraisal is used by the lender to determine how much money they will lend to you.

It’s also possible that you will have enough money to purchase the home without needing to first obtain a mortgage loan. This is only possible if your cash on hand is higher than the sale price for the home in question. In this situation, a contingency wouldn’t be necessary. However, you could still use an appraisal of the property to make sure that you aren’t paying a price that significantly higher than the value of the home.

If you decide to waive this contingency, you may be able to strengthen your offer. Without this contingency in place, you could position yourself ahead of the competition, which is important if you’re making a bid on a property that has already received multiple offers. You may be able to win the home this way because the seller invariably wants there to be less risk of the sale not going forward. Waiving the contingency means that the results of the appraisal wouldn’t affect the sale of the home.

What You Should Do When the Appraisal Is Lower Than the Offer Price

In the event that the value the home was appraised at is lower than the offer you made on the home, there are several things you can do. The option you choose depends entirely on how much you want the home. Keep in mind that not many homes are appraised at a price that’s below the contract price. In fact, the exact percentage of homes that are appraised at a lower price is below 10 percent. As long as an appraisal contingency is included in the original contract, you will have three options at your disposal. You could consider requesting another appraisal, ask the seller of the home to reduce the asking price, or pay the difference.

Try to Get a Second Appraisal

If the appraisal price is lower than the price that you offered for the home, you could attempt to obtain a second appraisal. Since the lender is in charge of hiring an appraisal company, you can submit a request to the lender that they choose another appraiser for an additional evaluation of the home value. When making this request, it’s important that you provide the lender with one or more reasons why you believe the initial appraisal to be incorrect. A few of the potential reasons include:

• Features of the home that have been improved or updated
  
• Similar homes in the surrounding area that have sold at a price that’s higher than the appraisal price
  
• Home features that might have been overlooked when the initial appraisal was made
  
• Information within the first appraisal that wasn’t accurate
  

It’s possible that the lender will deny your request for an additional appraisal. If this happens, you would need to pay for another appraisal on your own. On the other hand, your real estate agent could fill out and send in a rebuttal to the first appraisal. In this situation, the agent would likely provide the appraisal company with a list of similar homes that have been sold at higher prices. With this information in hand, the appraisal company may decide to reconsider the first appraisal.

Ask the Seller to Lower the Asking Price

This request is particularly common in situations where the home has been on sale for a lengthy period of time. It’s possible that the appraisal by another prospective buyer would be low as well, which is why the seller may agree to lower the asking price to the value that was obtained with the appraisal. This is likely the most straightforward option and allows you to avoid the hassle of obtaining another appraisal that could provide you with a similar price. If you want to get in your new home as quickly as possible, asking the seller to lower the price may be the ideal solution.

You Pay the Difference

The third and final option is to pay the difference yourself, which should only be done when the other two options haven’t worked out. While this isn’t a fantastic option, you might want to pay the difference between the contract price and the appraisal price if the home you’ve made an offer on is your dream home. If the appraisal price is only a few thousand below the asking price, it wouldn’t cost you too much to pay the difference. It may also be enough to save the deal.

What to Consider with Getting an Appraisal Contingency or Not?

When you are financing a home, it’s highly recommended that you include an appraisal contingency within the purchase contract that you sign. This contingency will provide you with protection in the event that the appraised value of the home is lower than the offer you made on the property in question. With this contingency in place, you could use the lower appraisal to obtain better terms or to walk away from the contract without losing the earnest money that you invested.

However, it’s also important that you take into account the benefits that come with waiving the contingency. Without this contingency in place, the seller may be more inclined to accept the offer that you’ve made as long as you pair the waiver of the contingency with a sizable down payment or a cash purchase. Make sure that you consider all of the aforementioned factors before you go forward with the remainder of the purchasing process.

Now that you’re more informed about what an appraisal contingency is and the benefits that it provides to buyers, it should be easier for you to decide if a contingency should be included in the contract. While a low appraisal can lengthen the closing process, you have several options at your disposal that allow you to continue buying the property. Whether you pay the difference or ask for a lower price, you will have a significant amount of control over what happens next.