How An Appraisal Contingency Can Protect You

Buying a home can be an expensive and risky proposition. Once you’ve made an offer on a house and it’s accepted by the seller, you’re both bound to the contract. As the buyer, if you back out for a reason not allowed by the contract, you’ll lose your earnest money deposit, which could be thousands of dollars.

That’s why an appraisal contingency is your ally: It will let you walk away from the deal with your deposit if the home doesn’t appraise for the amount you’ve agreed to pay.

Read on to learn more about what an appraisal contingency is and how it can protect you.

What Is An Appraisal Contingency?

Contingencies are conditions that must be met before a real estate contract is legally binding, and each includes a specified time frame. An appraisal contingency is a clause that allows home buyers to back out of their contract if the appraisal value of the property is less than the agreed-upon purchase price.

Other Types Of Contingencies

Most purchase agreements may include additional contingencies:

• A finance contingency: This states that the deal depends on the approval of your loan, also referred to as a mortgage contingency. It’s important to note that some loan types, such as FHA loans and VA loans, have certain property requirements that when found during an appraisal could lead to a loan not being approved.
• An inspection contingency: This requires that the home pass a home inspection.
• A title contingency: This states that the home sale depends on the results of the title search.
• Home sale contingency: This is commonly used when the buyer is selling their house at the same time.

When Do You Need An Appraisal Contingency?

If a lender is involved, you’ll need a home appraisal and should consider an appraisal contingency. “It’s an opt-out for the buyer who’s financing,” explains Susanna Haynie, a real estate broker in Colorado Springs, Colorado. “If the home is not worth the price the buyer has agreed to pay, it can impact how much the lender is willing to lend and possibly the ability of the buyer to secure the loan.”

Cash buyers have an option to add an appraisal contingency to their offer and engage an appraiser, “but it’s not a third-party requirement,” says Haynie.

Who Pays For The Appraisal?

The appraisal is an extremely important part of the home buying process, typically paid for by the buyer. The average cost that a buyer may pay for an appraisal is $300 – $500 and will be due most commonly at closing.

It's important to know that this estimate doesn't hold true for every home buyer – appraisal costs can be higher than $500 depending on your area, the size of your home, etc.

The lender will hire a third-party, state-licensed and registered appraiser to determine the fair market value of the home. The appraiser arrives at that value based on the home’s general condition, location and comparative sales (or comps) in the area.

How Long Does An Appraisal Contingency Take?

Your lender or real estate agent can provide guidance on the specific timing for your appraisal contingency, but generally you should allow 2 – 4 weeks for the appraiser to visit the home and complete their report or complete a drive-by appraisal in special circumstances. “Different loans take different qualifications,” says Haynie. “And some seasons will be busier than others for the inspectors.”

If the value comes in higher than the sales price, everyone is happy, except maybe the seller, who might feel they should have asked for more. But if the appraisal comes in lower, things can get complicated.

What Happens If The Appraisal Comes In Low?

The deadline for invoking an appraisal contingency is the date by which any claims made by the buyer must be made, as stated in the purchase agreement. So, if the appraisal comes in too low, the buyer can petition for a second appraisal.

If you go this route, be sure to make your lender aware of the reasons you think the home is worth more – maybe that’s recent comps the appraiser may have missed or something of value that’s not easily visible, like radiant floor heating.

If the value is still too low, there are three options:

1. The buyer can agree to bring more money to the table.
2. The seller can reduce the price to meet the lower property value.
3. Both parties may agree to split the difference in any combination.

The contract may be terminated by either party if they can’t agree.

Appraisal Contingency FAQs

What is an appraisal contingency waiver?

This is where you agree to pay the full amount of the contracted price, even if the appraisal comes in low.

Waiving the home appraisal contingency clause is rare – but there are exceptions. You might waive an appraisal if the determined higher or lower value does not have an influence on your ability to purchase the home and obtain the loan, which is usually the case of a large down payment.

Waiving an appraisal contingency can be a smart tactic for standing out in an extremely competitive seller’s market. Doing so could eliminate a seller’s fear that the deal might fall through if the property  doesn’t appraise for the initial asking price. “This may be a great strategy and very beneficial in a multiple-offer situation,” Haynie says.

You should understand, however, that you’re taking a risk. If the home appraisal is lower than the agreed upon purchase price, the contract is still valid, and you’ll be expected to complete the sale, lose your earnest money or pay for other damages.

For example, if you’re seeking a $300,000 mortgage but the appraisal comes in at $290,000, the mortgage lender is only able to finance $290,000. This leaves you to pay the remaining $10,000 out of pocket, as well as the down payment and other closing costs.

“In most cases, it’s best to keep the appraisal contingency in place,” Haynie says.

What is an appraisal contingency addendum?

An addendum is a separate form that, once signed by the buyer and seller, becomes part of the sales contract. Appraisal contingency addendums are state-specific and allow buyers to move forward with their purchase under certain agreed-upon conditions.

How does appraisal contingency removal work?

If you’ve weighed the risks of removing the appraisal contingency from your contract, there’s a few additional steps to finalize its elimination.

First, read through the contract to make sure you’re within the designated appraisal contingency period. The length of this decision-making timeline varies by state, as well as the terms in the real estate contract.

If it still applies, contact your real estate agent to get a contingency removal form. The completed form must be submitted in writing to the seller’s agent and signed by the seller for final confirmation. Don’t forget: Removing the appraisal contingency will make you, as the buyer, liable for the cost of all repairs and completion of the sale.

What are the benefits of an appraisal?

An appraisal helps you get approved for a mortgage and  tells you how much the property is worth. It also helps clarify that you’re not overpaying for the home you want to buy.

And if the appraisal does come back lower than the home’s sale price, it allows you to have solid grounds to negotiate with the seller on next steps. And lastly, an appraised value ensures that you are paying the correct amount of property taxes.

Overall, having an appraisal contingency can help you confidently buy your new home, even in a demanding real estate market.

The Bottom Line

While all contingencies are relevant to the home buying process, the appraisal contingency is one of the most important safeguards available to home buyers.

This piece of the real estate contract states that the buyer will only purchase the home if the appraisal is equal to or above the sales price. The appraisal contingency gives you the option to negotiate a lower sale price or walk away from the deal.

If you’re ready to take the next step and learn more about purchasing a home, start the application process today.