Understanding the Appraisal Contingency

The appraisal contingency is attached to the sales contract. This contingency states that if the home does not appraise at the sales price agreed upon, the buyer reserves the right to renegotiate the sales price or walk away from the deal if both parties cannot agree.

how the appraisal contingency is released 

The appraisal contingency is released if the home appraises at the sales price or higher. Negotiations are reopened if the home appraises for less than the sales price.

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The contract must move forward if the seller agrees to reduce the sales price to match the appraised value. In other words, if the home is appraised for less than the sale price but the seller agrees to the appraised price, the buyer cannot terminate the contract.

No Contingency: When the Property Appraises Lower than the Sale Price

If buyers do not have a home appraisal contingency in place and the property appraises for less than the sale price, then the buyer has no recourse to terminate the contract. 

So, what do you do if there is no appraisal contingency and the home appraises for thousands less than the sale price? 

If you are putting 20% or more down, the lender can usually adjust the loan and down payment amount, so your payment is higher to reflect the larger loan amount. This situation may require Private Mortgage Insurance (PMI). Generally, you will have a slightly higher payment and a slightly higher down payment. However, the thousands of dollars in the gap between the sale and appraisal prices will not all be brought to the table. 

Waiving the Appraisal Contingency

Buyers who waive the appraisal contingency but do not have 20% of the sales price for a down payment, such as FHA loans, may be on the hook for the difference in price and appraisal. You will not be paying more for the home, but your down payment can increase based on the sales price and appraisal value gap. This situation is the most considerable risk when not adding an appraisal contingency to the contract. 

What Can You Do When You Have to Remove the Appraisal Contingency?

When you have to remove the appraisal contingency in order to be competitive, you find yourself in a tricky and risky situation. You are risking it all on a third party’s opinion of what they believe the home is worth.

Real estate agents have a general idea of how much the home will be appraised. Everyone in the real estate industry has the same available data, such as comps and past sale prices, but that data is subjective. 

Buyers must understand that waiving the appraisal contingency to stay competitive poses a risk. Regardless of the data that agents have access to, no one can assure you with complete confidence that the home will be appraised at the amount the data reflects it should. Unfortunately, in this seller’s market with multiple offers on homes, it is a risk you may have to take. 

There is, however, an appeal process. When an appraisal comes in low, your agent can request an appeal. More often than not, these appeals fail unless specific errors and omissions are identified. 

Understanding Common Contingencies 

For a simple, straightforward understanding of the most common contingencies in real estate, visit our YouTube channel.