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What is an appraisal contingency?

Purchase offer contingencies help protect homebuyers and sellers

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Buying a home is exciting, but you might be concerned about making an offer only to find out the home is in need of costly repairs and isn’t worth the price. It’s impossible to know the true value of a home until it’s inspected and appraised. Including a few clauses in the purchase offer can keep you from losing money on your home purchase.

How does an appraisal contingency work?

An appraisal contingency is a specific type of clause within the purchase offer that protects the buyer and seller. The purchase offer is a contract to buy/sell the home under certain conditions. Some of the terms detailed in the purchase offer are the purchase price, closing date and any contingencies.

An appraisal contingency lets the buyer back out if the home appraises for less than the offer price.

In general, a contingency is a condition that must be met before the deal is complete. If a contingency isn’t met, the buyer can back out of the deal within a certain time frame without losing their earnest money, which is often included with the offer to show that the buyer is serious about the deal.

An appraisal contingency lets the buyer back out if the home appraises for less than the offer price. An appraisal contingency is common in offers that require financing from mortgage lenders since the home serves as collateral on the loan. While you may be willing to pay more than an appraiser says the home is worth, the bank isn’t going to take this risk.

If your house appraises for less than the offer

A low appraisal could mean trouble for both the buyer and the seller. However, it doesn’t always mean that the deal is immediately dead.

The buyer can request another appraisal from a different company for a second opinion. They can also offer a bigger down payment so that the amount they are borrowing from the bank is less. In addition, the buyer can negotiate with the seller to either lower the price or fix the issues that resulted in the low appraisal.

Appraisal contingency vs. mortgage contingency

Appraisal and mortgage contingencies both protect the homebuyer but in different ways. A mortgage contingency gives the buyer a way out if they aren’t able to secure the financing they had hoped for after they submit the offer.

The risk of this event occurring can be minimized if you ensure that you are preapproved for a mortgage by your lender — not just pre-qualified. Pre-qualification gives you a quick estimate of what you might be able to borrow based on a credit check and the information you provide to the lender.

Preapproval takes it a step further and gives you a quote from the lender with the maximum amount you can borrow and other loan terms. Preapproval usually takes a few days longer to obtain because the bank has to review your proof of income documents, like W-2s and income tax returns. Once the process is complete, you’ll receive a document called a preapproval letter.

This preapproval letter helps in the negotiation process because it gives you a limit to how much you can offer for a new home. It also takes some stress out of the homebuying process by letting you know you’ve secured financing ahead of time, and it shows the seller you are in a position to make an offer.

Other types of contingencies

Besides appraisal contingencies, there are several other clauses that can protect the buyer or seller when you’re purchasing real estate. Below are the most common contingencies in a purchase offer.

Financial contingency

A financial contingency is another name for a mortgage contingency. It gives the seller a way out if the buyer isn’t able to secure the financing they expected.

Inspection contingency

An inspection contingency states that the seller must allow a professional home inspection to be completed during a certain time frame before the closing.

The home inspector will give the buyer a report about the condition of the home’s foundation, HVAC system (heating and cooling), plumbing, electrical system, roof and other parts of the property. It needs to be completed with enough time for the buyer and their agent to request repairs before closing.

The inspection contingency could affect how much you end up paying for the home even after the initial negotiations. For example, say the home inspector finds that the HVAC unit is in dire need of repair or replacement. The buyer could request a price reduction to help compensate for the immediate costs the new homeowner will incur.

It’s up to the seller whether they want to lower the price, but they also run the risk of the deal falling through if they decide not to.

There are multiple contingency clauses that can be added to a purchase offer to protect the buyer or seller.

Title contingency

A title contingency gives the buyer the right to review the home’s ownership record (or property deed) for any judgments or liens on the property. You wouldn’t want to purchase a home that still has a lien on it for unpaid property taxes, for example. Otherwise, you could be held responsible for the debt of the previous owner.

In addition, you’ll want to ensure that the home’s title (or official ownership) can be successfully transferred to you without any hiccups. If it can’t, then you can back out of the deal. Your real estate attorney or a title company will handle legal matters like the title search.

Home sale contingency

A home sale contingency is less common than the other clauses mentioned, but you may find it in contracts where the buyer has their home on the market. It’s possible they need the cash from the sale in order to move forward with the purchase of the new property.

A home sale contingency states the buyer has to sell their current home by a certain date or the new purchase deal will fall through. There’s no guarantee the home will sell, so accepting a purchase offer with this contingency is risky for sellers.

If the buyer backs out, the seller will have to put their home back on the market to find a new buyer. In a seller’s housing market where homes have multiple offers, the homeowner may not even accept offers with this clause.

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    What if an appraisal comes in high?

    If the appraisal comes in higher than the purchase price, that’s usually great news for the buyer. That means the buyer is getting a deal on the home because it’s worth more than the price you will pay for it. However, property taxes are assessed based on appraised values, so you may want to consider the future tax liability as well.

    What does it mean to waive an appraisal contingency?

    If you choose to waive the appraisal contingency, you agree to pay the negotiated price for the home written in the offer regardless of what the home appraises for. However, it doesn’t mean you still can’t back out of the deal before closing. If you do, though, you’ll likely lose the earnest money and any other expenses you incurred during the process.

    How much does an appraisal cost?

    The appraisal cost depends on the location and size of the home. Most appraisals for single-family homes cost between $300 and $400.

    Can I get my appraisal money back?

    Once the appraisal has been completed, you won’t be able to get a refund for it. However, if you prepaid for an appraisal and cancel it before it’s occurred, you should be able to get your money back.

    Bottom line

    An appraisal contingency protects the buyer in the event the home appraises for lower than the price they offer. If you make an offer on a home and the appraisal comes in low, you have ways of keeping the sale alive — whether it’s asking the seller to lower the sale price, making a larger down payment or a combination of both. You could also potentially ask for a second appraisal if you think there’s been a mistake.

    The appraisal contingency is one of the most important clauses to include in your purchase offer. Your real estate agent can help you include the appropriate language in the contract — along with other contingencies that protect you as a buyer.

    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. To learn more about the content on our site, visit our FAQ page.
    1. Consumer Financial Protection Bureau, “My appraisal is less than the sale price. What does that mean for me?” Accessed Jan. 31, 2022.
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