What Is An Appraisal Contingency?

For many people their home is going to be the biggest financial asset that they own. When you are looking to purchase a home you will want to make sure that it is worth the price that you are paying for it. In order to ensure the estimated value of the home, an appraisal is typically performed prior to closing on the purchase. This is where an independent and licensed third party is hired to evaluate the home in relation to other similar homes that are in the area to a professionally recognized opinion of value. Many times your lender will require an appraisal to be ordered so that their investment (through financing your mortgage) is protected as well. 

An experienced real estate professional will do their best to price the home fairly when they put it on the market for their seller, and a skilled buyers agent will also be able to give an educated opinion when helping their buyer submit an offer on the property. This is the first step in making sure that you are not paying too much for the home you are looking to purchase. The next step is having the appraiser come out to the property to get an official valuation. In the majority of cases the appraisal will come back with a report that the home is valued at what it was listed for or very near to that number. Having the appraisal is just a formality to confirm that the home was priced correctly.

There are some cases, however, when the appraisal plays a bigger role in the transaction process. One of the most common scenarios is when multiple buyers are interested in the property so they submit an offer above list price to beat out the competition. This could result in the buyer paying more than the home is valued at. In this case the lender may not agree to finance the mortgage at the purchase price and the buyer will have to pay the difference between the purchase price and the appraised value out of pocket. 

Here is an example to help get a picture of this scenario: John Doe is interested in buying a home at 123 Main Street. The home is listed for $100,000, but the listing agent has let you know that there are multiple people interested in purchasing the property. Because of this, John’s agent suggests that he offer $105,000 because he knows how much John loves the home. John’s offer is accepted, and he goes on to apply for a mortgage to help purchase the property. The mortgage lender that John is using orders an appraisal of the property, and the report states that the value of the home is $100,000. Because of this, the lender is unable to help him finance the additional $5,000 between the purchase price and the appraised value. John will now have to pay the $5,000 out of his own pocket, attempt to negotiate with the sellers to lower the price to the appraised value, or walk away from the deal. 

In this scenario, John does not have the funds available to pay the additional $5,000 and the sellers are not willing to budge on their price. John is then forced to walk away from the deal. At this point there are two ways that this deal could go. If John’s agent included an appraisal contingency in their offer, John will be able to collect his escrow deposit that he made at the beginning of the transaction. The appraisal contingency is a clause that states the buyer has the ability to walk away from the deal with the right to have his deposit returned to him in the case where the home does not appraise for the purchase price. If John’s offer did not include an appraisal contingency, then the sellers may be able to keep John’s escrow deposit. 

If you would like to know more about the home buying process or want to know how to submit a great offer that is appealing to sellers while still protecting your interests, give our team of experienced real estate agents a call! We would love to walk you through the process and explain the contingencies we can put in place to protect your money. 

To learn more about appraisals and appraisal contingencies, take a look at this article from Redfin.com.