What Is an Appraisal Contingency and How It Works

A real estate contingency clause functions as a condition that must be satisfied for a purchase agreement to proceed. These clauses serve as a protective measure, allowing parties to withdraw from a contract without penalty if specific circumstances are not met. This article will specifically explore the appraisal contingency, detailing its function and implications for both buyers and sellers.

Understanding Appraisal Contingencies

An appraisal contingency makes a home sale dependent on the property being valued at or above the agreed-upon purchase price. It safeguards the buyer from overpaying for a property. It also protects the mortgage lender by ensuring they do not finance a loan for an amount exceeding the home’s fair market value. For buyers, this contingency is important for financial security, aligning the property’s value with the loan amount needed for approval. Such a contingency is a common element found in many real estate contracts, providing a layer of security in the transaction.

Process of an Appraisal Contingency

The appraisal process begins after an offer is accepted. The buyer’s lender then initiates the appraisal to determine the property’s value. A state-licensed appraiser evaluates the home, considering its features, condition, and comparable sales in the surrounding area to establish fair market value. The evaluation results in two outcomes: the appraised value meets or exceeds the purchase price, or it is lower than the agreed-upon amount. A low appraisal triggers the contingency, allowing the buyer to renegotiate terms or withdraw from the sale.

Handling an Appraisal Gap

An “appraisal gap” occurs when the property’s appraised value is lower than the agreed-upon purchase price in the contract. Several options are available to buyers and sellers to bridge the financial difference.

The buyer can cover the gap by bringing additional cash to closing. Alternatively, the seller might lower the purchase price to match the appraised value. Negotiation is also common, where both parties might agree to split the difference.

If a resolution is not reached, the appraisal contingency allows the buyer to withdraw without penalty, often with their earnest money deposit returned. The specific course of action depends on the terms outlined in the purchase agreement and the willingness of both parties to negotiate.

Fulfilling or Waiving the Contingency

The appraisal contingency is fulfilled if the property’s appraised value meets or exceeds the purchase price. The transaction then proceeds without appraisal-related adjustments.

However, a buyer may waive the appraisal contingency, either when making an offer or during negotiations. Waiving it means the buyer accepts financial responsibility if the appraisal is lower than the purchase price. This means the buyer covers any appraisal gap out of pocket, or risks defaulting and losing their earnest money deposit.

A waiver is formalized through an amendment to the purchase agreement.