The Appraisal Contingency

What is an Appraisal?

If you are getting a loan, an appraisal is 100% needed. An appraisal is when the bank orders an appraiser to visit and fully assess the property for an appraised value. This is to help protect the banks to ensure they are not lending money on an overvalued property. Banks will only lend money on the appraised value.

What is an Appraisal Contingency?

The Appraisal Contingency is used to protect the buyers in an instance where the property does not appraise at the buyer’s full offer price. In this case, the buyer has a number of different options.

1. The buyer can back out of the deal and recoup their deposit. Buyer may want to back out if they feel as though they are over paying for a home.
2. The buyer will have to pay the difference up front. For example, if a buyer offered to buy a home at $800k and the appraisal came in at $780k, the buyer will have to pay the difference up front. In this example the buyer will have to put the agreed percentage of the down payment on the appraised value (in this case 20% of $780k) = $156k plus an additional $20k to cover the difference totaling a total down payment of $176k.
3. The buyer can request the seller to reduce the price to the appraised value.
4. The buyer and seller may negotiate and agree to reduce a portion of the difference and the buyer will have to come up with the rest.

What happens when a buyer waives the Appraisal Contingency?

First of all, you may be asking yourself why would a buyer want to waive their only protection? In a competitive market, buyers must stand out and separate themselves from the rest of the competition. Because of this, buyers submit offers over asking price, sometimes $50k over and other times $100k over. This results in instances where the property will not appraise at full value and if the appraisal contingency is waived, the buyers are telling the sellers they are 100% committed to their offer price.

Before doing this, we do our due diligence to estimate what the appraised value will come in at along with verifying funds available for this commitment.

In today’s market, it is common to see offers with an appraisal contingency waived and if the property appraises below the offer price, solution #2 would be used.