Protecting Your Home Purchase with an Appraisal Contingency
Buying a home involves substantial costs and risks. Once your offer is accepted by the seller, both parties are bound by the contract. If you, as the buyer, decide to back out for reasons not permitted by the contract, you risk losing your earnest money deposit, which can be a significant amount. To protect yourself, it's essential to have an appraisal contingency in place, allowing you to walk away from the deal with your deposit if the home doesn't appraise for the agreed-upon purchase price. Let's explore what an appraisal contingency is and how it can safeguard your interests.
Understanding the Appraisal Contingency
Contingencies are conditions that must be met for a real estate contract to become legally binding, and each contingency has a specific timeframe. An appraisal contingency is a clause that enables buyers to back out of the contract if the property's appraised value is lower than the agreed-upon purchase price.
Other Types of Contingencies
In addition to the appraisal contingency, most purchase agreements may include the following contingencies:
Finance Contingency: This contingency states that the deal is dependent on loan approval. Certain loan types, such as FHA and VA loans, have specific property requirements, and an unfavorable appraisal may affect loan approval.
Inspection Contingency: This requires the home to pass a professional inspection.
Title Contingency: The sale is contingent upon the results of a title search.
Home Sale Contingency: This is applicable when the buyer needs to sell their current home before purchasing a new one.
When Do You Need an Appraisal Contingency?
If a lender is involved in your home purchase, it's advisable to include an appraisal contingency. Susanna Haynie, a real estate broker in Colorado Springs, explains that it's an opt-out for buyers who require financing. If the home's appraised value doesn't meet the agreed-upon price, it can impact the lender's willingness to approve the loan and the buyer's ability to secure it.
Cash buyers have the option to include an appraisal contingency in their offer, but it is not typically a third-party requirement.
Who Pays for the Appraisal?
The buyer is typically responsible for the appraisal cost, which can range from $300 to $500 on average. However, actual costs may vary depending on factors such as location and the size of the home. The lender hires a state-licensed and registered appraiser who determines the fair market value of the property based on its condition, location, and comparable sales in the area.
How Long Does an Appraisal Contingency Take?
The specific timing for an appraisal contingency can be provided by your lender or real estate agent, but typically you should allow 2 to 4 weeks for the appraiser to visit the home and complete their report. In special circumstances, such as a drive-by appraisal, the process may be expedited. The timing can vary depending on loan requirements and the availability of inspectors.
Dealing with a Low Appraisal
If the appraisal comes in lower than the sales price, the deadline for invoking the appraisal contingency is the date by which the buyer must make any claims, as specified in the purchase agreement. The buyer can request a second appraisal, providing reasons why they believe the home is worth more. If the value remains low, there are several options:
The buyer can bring additional funds to cover the shortfall.
The seller can reduce the price to match the appraised value.
Both parties can negotiate a compromise, such as splitting the difference.
If no agreement is reached, either party may choose to terminate the contract.
Frequently Asked Questions about Appraisal Contingencies
What is an appraisal contingency waiver? This is when the buyer agrees to pay the full contracted price, even if the appraisal is lower. Waiving the appraisal contingency is uncommon but can be beneficial in competitive seller's markets. However, it comes with risks, as the buyer would be responsible for covering the shortfall if the appraisal value is lower than the purchase price.
What is an appraisal contingency addendum? An addendum is a separate form that becomes part of the sales contract once both parties sign it. An appraisal contingency addendum outlines agreed-upon conditions under which the buyer proceeds with the purchase.
How does appraisal contingency removal work? If you decide to remove the appraisal contingency from your contract, check the contract to ensure you are within the designated contingency period. Obtain a contingency removal form from your real estate agent, complete it, and submit it in writing to the seller's agent for final confirmation. Keep in mind that removing the appraisal contingency makes you liable for repair costs and completion of the sale.
What are the benefits of an appraisal? An appraisal helps you secure a mortgage by assessing the property's value. It also ensures that you are not overpaying for the home and provides a basis for negotiation if the appraisal value is lower than the sales price.
The Bottom Line
Among various contingencies, the appraisal contingency is crucial for protecting home buyers. It states that the buyer will only proceed with the purchase if the appraisal value matches or exceeds the sales price. This contingency provides an opportunity to negotiate a lower price or walk away from the deal. In a competitive real estate market, having an appraisal contingency can give you the confidence to navigate your home purchase successfully.