What Is an Appraisal Addendum in Real Estate?

An appraisal addendum is a legal document in real estate transactions that clarifies or modifies a purchase agreement. It addresses potential discrepancies between the agreed-upon price and the home’s appraised value. This provides a framework to prevent the sale from being jeopardized by appraisal outcomes.

What is an Appraisal Addendum?

An appraisal addendum is a formal document attached to a real estate purchase agreement. Its primary function is to address circumstances where the property’s appraised value differs from the agreed-upon purchase price. It modifies terms of the original contract, especially regarding the appraisal contingency.

The appraisal contingency is a standard clause in most real estate contracts, allowing the buyer to withdraw from the deal without penalty if the property’s appraised value is lower than the purchase price. An appraisal addendum works in conjunction with this contingency, outlining specific actions and agreements should such a valuation gap occur. It becomes an integral part of the overarching real estate agreement once both the buyer and seller sign it.

Common Scenarios for Use

When a property’s appraised value comes in lower than the sales contract price, an appraisal addendum becomes necessary. This situation, known as an “appraisal gap,” can halt a transaction because lenders typically base loan amounts on the appraised value, not the contract price. The addendum facilitates negotiations to bridge this gap and keep the sale moving forward.

One common use involves outlining renegotiated terms, such as a price reduction by the seller to match the appraised value. Alternatively, the addendum can stipulate that the buyer agrees to cover the difference between the appraised value and the contract price, either partially or in full. Another scenario includes the seller offering concessions, which are contributions toward the buyer’s closing costs or other expenses, effectively reducing the buyer’s out-of-pocket costs. The addendum can also define conditions for the appraisal itself, like requiring certain repairs to be completed before the final valuation is accepted.

Key Elements of an Appraisal Addendum

The “appraisal gap clause” is a common component, where a buyer commits to paying a certain amount above the appraised value if it falls short of the purchase price. This clause often includes a specified dollar limit the buyer is willing to cover, providing a defined financial commitment.

Another key element is the “appraisal contingency waiver,” where the buyer agrees to forgo their right to terminate the contract if the appraisal comes in low. Waiving this contingency makes an offer more attractive to sellers, especially in competitive markets, but places more financial risk on the buyer. Conversely, some addendums include a “right to terminate” clause, allowing the buyer to back out of the deal without losing their earnest money if the property does not appraise for a specified minimum amount. This provides a safeguard for the buyer, ensuring they are not obligated to purchase a property significantly over its appraised value.

Impact on the Transaction

An appraisal addendum significantly influences the overall real estate transaction. It provides a structured framework for resolving issues arising from differing appraised values and agreed-upon prices, helping to keep the deal on track. Without it, a low appraisal could lead to the transaction’s collapse, potentially costing both parties time and resources.

The addendum clarifies the financial responsibilities of both the buyer and seller concerning the appraisal outcome. It ensures both parties understand their obligations and the revised terms, facilitating a smoother path toward closing the transaction.