What is an appraisal contingency?
An appraisal contingency is a clause in a real estate contract that can give buyers peace of mind when purchasing a property. Essentially, it allows the buyer to back out of the transaction or negotiate the terms of the sale if the property’s appraised value is lower than the agreed-upon purchase price.
How an appraisal contingency works
After the purchase agreement is signed, the buyer typically has a certain number of days to obtain an appraisal of the property from a licensed appraiser.
The appraiser evaluates the property based on several factors, including its size, location, condition, and recent sales of comparable properties in the area. The appraiser then provides a written report that includes an appraised value for the property.
If the appraised value is equal to or higher than the purchase price, the buyer can proceed with the sale. However, if the appraised value is lower than the purchase price, the buyer has a few options.
The home buyer can request a renegotiation of the purchase price with the seller, walk away from the sale, or choose to proceed with the sale and pay the difference between the appraised value and the purchase price in cash, as a larger down payment, or by increasing the loan amount.
If the appraisal comes in significantly below the minimum value required by the lender, the lender may not be willing to finance the loan at all. Therefore, it’s crucial for buyers to pay attention to the appraised value and consider the possible outcomes before signing a purchase agreement.
|Key Takeaways – Appraisal Contingency|
|Paying over the asking price for a property is a subjective decision that depends on individual circumstances such as the current real estate market, the location of the property, and your financial situation.|
|Consider your short-term and long-term goals for the property when deciding whether to pay over asking price.|
|An appraisal contingency is a clause in a real estate purchase contract that protects the buyer from overpaying for a property. It states that the sale of the property is contingent upon the property’s appraised value meeting or exceeding a certain amount.|
|Whether or not to waive an appraisal contingency is a personal decision that should be based on your individual circumstances and the current real estate market. Consider your financial situation, the strength of the real estate market, the property itself, and your risk tolerance before making a decision.|
|In addition to an appraisal contingency, other contingencies that may be included in a real estate purchase contract include financing contingency, home inspection contingency, sale of current home contingency, title contingency, and appraisal gap contingency.|
|It’s crucial to take contingencies seriously and to only accept terms that you’re comfortable with and can fulfill. Seek guidance from your real estate agent if you have concerns or need to renegotiate the terms of your contract.|
Will the mortgage company finance a loan with a low appraisal?
It is possible for a mortgage company to finance a loan with a low appraisal, but it depends on the specific circumstances and the policies of the lender.
In most cases, the lender will require the borrower to make up the difference between the appraised value and the purchase price in the form of a larger down payment.
Steps of an appraisal contingency
In a real estate contract, an appraisal contingency allows the buyer to withdraw from the agreement or modify the purchase terms if the appraised value is lower than the agreed-upon price.
The following steps are typically involved in an appraisal contingency:
Buyer requests an appraisal: The buyer usually has a specific period to obtain an appraisal of the property after signing the purchase agreement. Then, the buyer pays for the appraisal, which is conducted by a licensed appraiser.
An appraisal is conducted: The appraiser inspects the property, considers its size, location, condition, and recent sales of comparable properties in the area, and then prepares a written report with the appraised value.
Buyer reviews the appraisal: If the appraised value is equal to or higher than the purchase price, the buyer proceeds with the sale. If it’s lower, the buyer has a few options.
Request renegotiation: The buyer can ask the seller to lower the purchase price to match the appraised value, and the seller may agree to it to continue the sale.
Walk away: The buyer can cancel the contract and walk away from the purchase, mainly if the difference between the appraised value and the purchase price is substantial.
Pay the difference: The buyer may choose to pay the difference between the appraised value and the purchase price in cash, a more substantial down payment, or by increasing the loan amount.
Seller responds: The seller has a specific time frame to respond to the buyer’s request, either agreeing to the renegotiation, rejecting it, or offering a counteroffer.
Appraisal contingency is a safeguard for buyers, preventing them from overpaying for a property and allowing them to modify the terms of the agreement if the appraised value is lower than the purchase price.
Pros and Cons
|✔ Provides Protection: An appraisal contingency protects the buyer by ensuring that they won’t have to pay more for the property than it’s actually worth.||❌ May Delay Closing: If the appraisal comes back lower than the purchase price, negotiations may need to take place to adjust the price or other terms of the contract, which could delay the closing process.|
|✔ Gives Leverage: The appraisal contingency can provide the buyer with leverage in negotiating a lower purchase price or better terms if the appraisal comes in lower than the agreed-upon purchase price.||❌ May Result in a Failed Sale: If the appraisal comes in lower than the purchase price and the buyer and seller are unable to come to an agreement on the price or terms, the sale may fall through.|
|✔ Allows for Renegotiation: If the appraisal comes in lower than the purchase price, the buyer can use the appraisal contingency to renegotiate the terms of the sale, which could lead to a more favorable outcome for the buyer.||❌ May Increase Costs: The appraisal contingency may result in additional costs for the buyer, such as the cost of the appraisal itself or the cost of renegotiating the terms of the sale.|
|✔ Provides Peace of Mind: Knowing that there’s an appraisal contingency in place can give the buyer peace of mind, as they know they won’t be forced to pay more for the property than it’s worth.||❌ May Reduce Seller Interest: Sellers may be less interested in offers that include an appraisal contingency, as it may signal a potential issue with the sale or delay in closing.|
Is it a good idea to pay over asking?
When it comes to paying over the asking price for a property, there are various factors that should be taken into consideration.
The decision to pay more than the listed price ultimately depends on the current state of the real estate market, the location of the property, and the financial situation of the buyer.
In a highly competitive real estate market, where multiple buyers are vying for the same property, offering above the asking price may be necessary to ensure the property is secured.
In such cases, it may be a wise choice to pay more than the asking price if the buyer is financially capable and truly desires the property.
However, in a slow real estate market or if the property has been on the market for a significant amount of time, paying over the asking price is usually not necessary or advisable.
Thorough research should be conducted to determine if the listed price is reasonable based on the property’s location, condition, and recent sales of similar properties in the area.
Furthermore, buyers should consider the long-term financial implications of offering more than the asking price.
Homebuyers who pay more than the appraised value of the property may encounter difficulties securing financing or refinancing the property in the future, which could impact their ability to sell the property later on.
It is recommended that buyers work closely with their real estate agent and mortgage lender to evaluate their individual circumstances and make an informed decision.
what if i stay in the house for a long time
If your plan is to stay in a house for a long time, then paying over the asking price may not be a major concern since you will have more time to recover any extra money paid at the time of purchase through the property’s equity growth.
When planning to stay in a property for a long time, it is crucial to evaluate the property’s location, size, and condition, as well as your future housing needs, to ensure that the property meets your current and future requirements. Additionally, obtaining a fixed-rate mortgage may be a suitable option to have a stable, predictable monthly payment over the life of the loan and to help you budget for your housing expenses.
If your planning to keep the house for short term like 2 years
If you’re planning to own a property for just 2 years, paying over asking price might not be a sound financial decision, especially if the market is not appreciating quickly. T
his is because you may not have enough time to gain equity in the property to recover the additional money spent during purchase.
It’s crucial to assess the current state of the real estate market and the potential for appreciation in the area where the property is situated. If the market is appreciating rapidly, and you anticipate the property’s value will increase significantly in the next two years, paying over asking price could be a good investment.
However, if the market is not appreciating quickly or is expected to decline, paying over asking price is not wise.
If you plan to own the property for only two years
You may want to consider a shorter-term mortgage, such as an adjustable-rate mortgage (ARM).
An ARM generally has a lower interest rate than a fixed-rate mortgage but may adjust after a specific period. This can help you save money on your monthly mortgage payment during your ownership.
with a real estate agent and mortgage lender to determine the most suitable course of action for your unique circumstances.
Appraisal Contingency Example
An appraisal contingency is a clause in a real estate purchase contract that protects the buyer from overpaying for a property.
It states that the sale of the property is contingent upon the property’s appraised value meeting or exceeding a certain amount.
Here’s an example of how an appraisal contingency might work:
Suppose you are a homebuyer and you’ve made an offer of $300,000 for a property. As part of your purchase agreement, you include an appraisal contingency that specifies that the sale is conditional upon the property being appraised for at least $300,000.
After the contract is signed, a licensed appraiser is hired to evaluate the value of the property.
The appraiser assesses the property, taking into account several factors such as its location, size, condition, and sales of similar properties in the area.
If the appraiser determines that the property is worth $300,000 or more, the sale can proceed as planned.
However, if the appraised value of the property is less than $300,000, the appraisal contingency comes into effect.
In this case, the buyer has three options.
First, they can negotiate with the seller to lower the purchase price to the appraised value.
Second, they can choose to terminate the contract and receive a refund of their earnest money deposit.
Third, the buyer can decide to move forward with the sale and pay the difference between the appraised value and the purchase price in cash, as a larger down payment.
This third option may be a viable choice if the buyer really wants the property and is willing to pay more than the appraised value for it.
Waiving the appraisal contingency
Here are some factors to consider when deciding whether to waive an appraisal contingency:
Your financial situation: If you have the financial resources to cover any difference between the appraised value and the purchase price, waiving the contingency may be a viable option for you. However, if you do not have the financial resources to cover the difference, waiving the contingency could put you at risk of paying more than the property is worth.
The strength of the real estate market: If the real estate market is strong and properties are selling quickly with multiple offers, waiving an appraisal contingency may increase your chances of having your offer accepted. However, if the market is slow or uncertain, waiving the contingency may not be necessary or advisable.
The property itself: The value of a property can vary widely depending on factors such as location, condition, and size. If you are confident that the property is worth the purchase price, waiving the contingency may be a reasonable decision. However, if there are any concerns about the property’s value, it may be wise to include the contingency.
Your risk tolerance: Ultimately, the decision to waive an appraisal contingency comes down to your personal risk tolerance. If you are comfortable taking on the risk of paying more than the property is worth, waiving the contingency may be an option for you. However, if you are risk-averse and want to protect yourself from overpaying, including the contingency is the safer choice.
Does your contract have an appraisal contingency?
If you’re in the process of buying a property, it’s important to review your purchase contract carefully to determine if it includes an appraisal contingency.
This provision may be referred to by other terms, such as an “appraisal provision” or an “appraisal addendum.”
The section of the contract that outlines the conditions of the sale is where you should focus your attention. Look for language that specifically addresses the property’s appraised value and how it relates to the purchase price.
If you’re unsure whether your contract includes an appraisal contingency or how it works, it’s best to consult with your real estate agent or attorney for clarification.
Understanding the terms of your appraisal contingency and its potential impact on your purchase is critical, so be sure to ask any questions you may have and only sign the contract if you’re comfortable with its terms.
Contingencies to be aware of
In addition to an appraisal contingency, there are several other types of contingencies that may be included in a real estate purchase contract.
This contingency enables the buyer to have a professional home inspection performed on the property. If the inspection uncovers significant defects or issues, the buyer may be able to renegotiate the purchase price or cancel the contract.
This contingency states that the sale of the property is dependent on the buyer securing financing for the purchase. If the buyer can’t obtain financing, the sale may be canceled.
Sale of Current Home
This contingency allows the buyer to make their purchase of the new property contingent on the sale of their current home. If the buyer can’t sell their current home within a specified time frame, the purchase of the new property may be canceled.
This contingency stipulates that the sale of the property is dependent on a clear title search that ensures there are no liens or other legal issues with the property that would prevent the buyer from taking ownership.
Appraisal gap contingency:
This contingency permits the buyer to agree to pay a certain amount over the appraised value of the property, up to a specified amount, to close the sale. If the appraisal gap exceeds the specified amount, the buyer may have the option to renegotiate the purchase price or cancel the contract.
What is the appraisal process?
Learn about the real estate appraisal process and why it’s essential for both buyers and sellers. Discover what appraisers look for, how they determine a property’s value, and the factors that can affect the appraisal. Gain insights into how to prepare for an appraisal and what to expect during the appraisal process.
consequences of not fulfilling a contingency
If you fail to meet a contingency that’s included in your purchase contract, you may be in breach of contract. This means that you’ve failed to fulfill the terms of the contract and may be held responsible for damages, which could involve losing your earnest money deposit or being sued by the other party.
For instance, if you waive an appraisal contingency and the property appraises for less than the purchase price, you may be required to complete the sale at the agreed-upon price, even if it’s higher than the appraised value. If you refuse to complete the sale, the seller may have the right to keep your earnest money deposit and/or take legal action against you.
Similarly, suppose you can’t satisfy the terms of a financing contingency and can’t obtain financing for the purchase. In that case, you may be in breach of contract and could be held liable for damages.
It’s crucial to take contingencies seriously and to only accept terms that you’re comfortable with and can fulfill. If you have concerns about fulfilling a contingency or need to renegotiate the terms of your contract, seek guidance from your real estate agent.