Real Estate News & Market Insights:
- An appraisal contingency lets buyers renegotiate or withdraw if the home's value is less than the purchase price.
- When the appraisal meets or exceeds the purchase price, the transaction proceeds, but buyers may need to cover any price difference.
- Waiving an appraisal contingency can enhance offers but carries risks, especially if buyers are unsure of the property's value.
- Benefits include financial protection, negotiating power, and the ability to walk away if the appraisal valuation is low.
Whether you’re a first-time homebuyer or seasoned buyer looking to upgrade or downsize, navigating the housing market can definitely be daunting. Regardless of your experience level, the complex jargon and legalities involved when home buying can be difficult to understand, but don’t worry. In this Redfin Real Estate article, we’ll be exploring exactly what an appraisal contingency is and how it can impact the homebuying journey, so there’s one less term to be confused about.
Key takeaways
- An appraisal contingency allows the buyer to renegotiate or back out of the deal if the home appraises for less than the purchase price.
- If the home appraises for the same or more than the agreed-upon purchase price, the deal continues – sometimes the buyer will have to make up the price difference.
- You may choose to waive an appraisal contingency to make your offer more attractive or if you’re confident in the property’s value, but it’s risky.
Table of contents
What is an appraisal contingency?
An appraisal contingency is a clause in a real estate purchase agreement that allows the homebuyer to back out of the transaction or renegotiate the terms of the sale if the property appraisal comes in lower than the agreed-upon purchase price.
Benefits of an appraisal contingency
There are several reasons buyers may include an appraisal contingency, such as:
- Financial protection: If the appraised value is lower than the agreed-upon price, the buyer isn’t stuck purchasing the overpriced property.
- Negotiating power: The buyer can renegotiate the terms of the purchase if the appraised value is lower than the agreed-upon price.
- Ability to walk away: If the appraised value is lower than the agreed-upon purchase price, the buyer can terminate the deal and get their money back.
Drawbacks of an appraisal contingency
Despite the benefits, there are a couple of reasons why a buyer might not want to include an appraisal contingency, such as:
- Less competitive offer: A seller may favor an offer without an appraisal contingency, especially in a competitive market.
- Renegotiation changes: If the appraised value is lower than the agreed-upon purchase price, it’s possible for the seller to change their offer.
How does an appraisal continency work?
With an appraisal contingency, the sale is contingent upon the property being appraised for a certain value – here’s how it works:
- The buyer and seller agree upon a purchase price for the property.
- If the buyer opts for it, they apply for a mortgage. Here, the lender requires an appraisal to determine the property’s value.
- A licensed real estate appraiser evaluates the property to determine its value.
- If the appraised value is the same or greater than the agreed-upon purchase price, the sale proceeds. In some cases, the buyer may also have to pay the difference in price.
- If the appraised value is less than the agreed-upon purchase price, the buyer can back out of the sale without penalty, renegotiate terms, or request the seller make repairs or upgrades to reflect the appraised value.
What happens if the appraisal is lower than the sale price
If the house appraises for less than the offer and an appraisal contingency is in place, the buyer can
- Renegotiation of the purchase price: The buyer can negotiate with the seller to reduce the purchase price to match the appraised value.
- Additional down payment: If the buyer still wants to purchase the property, they may need to make a larger down payment to compensate for the difference in value.
- Deal cancellation: If the buyer does not want to negotiate, they can back out of the deal without repercussions.
What happens if the appraisal is higher than the sale price
If the appraised value is higher than the agreed-upon purchase price, the purchase can proceed as planned with the agreed-upon price. In most cases, the seller is legally bound to the agreed-upon price regardless of the appraisal value; exceptions include contract terms or state laws. In some situations, the buyer may be asked to make up the price difference.
What are appraisers looking for?
The appraisal value is important in determining the maximum amount a lender is willing to finance and helps the buyer and seller negotiate a fair price. The appraisal value is determined by a licensed appraiser who evaluates the property’s market value. Certified appraiser John Mulligan of Maui Aina Appraisal Company notes the following factors:
- Property characteristics: the configuration, improvements, and amenities of a property such as the square footage, the number of bedrooms and bathrooms, the age of the property, and any unique features like a pool or fireplace.
- Location: The location of the property, including the neighborhood, nearby amenities, and school district.
- Comparable properties: The property is compared to three other recently sold (within the last 90 days) properties that are similar in size, age, and features.
- Condition of the property: The condition of the property, including any needed repairs or updates.
- Market trends: Market trends and economic conditions at the place that may affect the value of the property are considered.
- Zoning and use restrictions: Any zoning or use restrictions that may affect the value of the property are taken into account.
Can an appraisal contingency be waived?
Yes, you can waive an appraisal contingency, but it’s risky. Consider waiving an appraisal contingency if:
- You are a cash buyer
- The property is in high demand
- You are confident in the value
If you do decide to waive an appraisal contingency and the property does not appraise for the purchase price, you may be responsible for making up the price difference in cash.
Related FAQs about appraisal contingencies
Is there an appraisal contingency deadline?
The appraisal contingency deadline is negotiated between the buyer and seller and is typically set at 7-10 days after the appraisal is conducted.
How long is an appraisal good for?
Appraisals are typically considered valid for 120 days (4 months) from the date of the report, but the validity period can vary depending on the type of loan and the lender’s requirements.
Who pays for an appraisal?
Typically the buyer is responsible for paying for the appraisal as part of their closing costs. However, in some cases, the seller may agree to pay for the appraisal.
How long does an appraisal take?
The appraisal process can take anywhere from a few days to a few weeks. The timeframe for an appraisal depends on factors such as the size and complexity of the property, the appraiser’s workload, and local market conditions.
How much does an appraisal cost?
The cost of an appraisal ranges from a few hundred dollars to several hundred dollars depending on the location, size, and complexity of the property.
What is an appraisal gap clause?
An appraisal gap clause is a provision in a real estate contract that addresses the difference between the appraised value of the property and the purchase price agreed upon by the buyer and seller.
What is the difference between an appraisal contingency and a finance contingency?
A finance contingency is a clause in a real estate purchase agreement that makes the sale of the property contingent upon the buyer obtaining financing to purchase the property, not on the appraised value. The purpose of a finance contingency is to protect the buyer from being contractually obligated to purchase the property if they are unable to secure financing and is typically resolved once the buyer has secured financing.
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