What Is an Appraisal Contingency? Should I Waive It?

Posted On: May 31, 2017

We have said it time and time again… the home-buying process is a complex one. When buying a home, as part of the real estate deal, there are certain contingencies that may be included to protect the buyer and the seller. Contingencies must be met for the contract to be legal and binding. In this article, we will explore the contingency clause.

WHAT IS AN APPRAISAL CONTINGENCY CLAUSE?

An appraisal contingency clause is written into a real estate contract to protect buyers. The clause is meant to ensure a property is valued at a minimum specified amount. If the property does not appraise for at least the specified amount, the contract can be terminated.

Example: If a buyer and seller agree to a purchase price of $350,000 and the home is appraised for $300,000, then the contract can be void by the buyer without penalty.

If a home is appraised for less than the agreed selling price and the seller wants to save the deal, the seller will need to reduce the price of the home to match the appraised value.

This is why it is a good idea for a seller to have a home appraised and discuss the property with a reputable real estate agent before deciding on a listing price. This crucial step could save loads of time and potentially even the entire sale.

WHY ARE APPRAISAL CONTINGENCY CLAUSES IMPORTANT?

This is one of the most import clauses in a real estate contract because a mortgage lender will not lend more money on a property than its appraised worth. In the unfortunate situation that a borrower fails to fulfill a loan, the lender will not be able recover their money because the home is worth less than the original negotiated loan. Makes sense, right?

SHOULD YOU WAVE THE HOME APPRAISAL CONTINGENCY?

If a buyer decides to waive the contingency clause, it can be seen to the seller as a stronger offer. If a buyer is aware of other offers on the table, waiving the contingency appraisal clause may make their offer more appealing to a seller.

However, in most situations, it is not considered best practice to waive this contingency clause. The clause protects buyers in the event they cannot secure financing. Keep in mind that although waiving the contingency strengthens your offer, it carries high risk.

Before making the decision to waive an appraisal contingency clause, remember that this clause is written into a contract to protect buyers. Consider your risks carefully and discuss the possible outcomes with a trusted real estate professional.