What is an appraisal contingency?
Updated June 18, 2021
Real estate contracts often include contingencies, which are conditions that must be met before a deal can go through. An appraisal contingency protects the buyer in the event that an appraiser determines a home’s value is less than its sales price.
Licensed appraisers examine properties to determine their fair market value for buyers. Home appraisals are particularly important for buyers using financing to make a purchase. Mortgage lenders require that homes be appraised before they’ll issue a loan, and will only issue mortgages for the value that a property is appraised for. If the appraised value of a property is lower than the sales price, the buyer will have to make up the difference themselves, or ask the seller to come down in the price.
If there’s an appraisal contingency in the contract, though, the buyer can opt to walk away from the deal, and get their deposit money back.
Licensed appraisers examine properties to determine their fair market value for buyers. Photo: Pixabay
Contingencies in Contracts
When a buyer and seller agree on an offer, the buyer then makes a deposit and a real estate contract is drawn up. A buyer’s agent helps them decide which contingencies to add to their contract; other common contingencies include mortgage contingencies and inspection contingencies. The contract becomes legally binding only once its contingencies are met.
Note that appraisals come with time limits due to fluctuations in the market, and an appraisal is typically good for periods from 60 to 120 days. An appraisal can expire if a deal is held up for too long.
When the Appraisal Is Below the Home’s Sales Price
If the appraisal comes in below the home’s sales price, and there is an appraisal contingency in the contract, the buyer can back out of the deal with no penalty. They could also opt to have a second appraisal conducted, if they believe the home is worth more than the first appraiser determined, which may result in a better appraised value and enable the buyer to secure the loan they need.
Alternatively, the seller could also decide to drop the sales price in order to meet its appraised value and proceed with the deal. And in some cases, buyers may include some language in their appraisal contingency that allows them to go ahead with the transaction even if the home is appraised for lower than its sales price, in which case the buyer will be responsible for putting down however much money is not covered by the loan. Buyers and sellers also may be able to work out agreements in which they meet in the middle, with the seller dropping the sales price and the buyer increasing their down payment.
In especially hot markets, buyers sometimes choose to waive contingencies in their contracts to have an edge over the competition. This can be risky, and is only recommended for buyers who have the cash on hand to deal with the expenses that come with a lower than expected appraisal.