What is an Appraisal Contingency? A Guide for Homebuyers

An appraisal contingency is a crucial clause in a real estate purchase agreement that protects the buyer if a professional property appraisal falls short of the agreed-upon sale price. This clause allows you to renegotiate the price, request repairs, or walk away from the deal without losing your earnest money deposit. Understanding this contingency is essential for navigating the homebuying process, especially in competitive markets.

What is an Appraisal Contingency in Real Estate?

An appraisal contingency is a clause in a real estate contract that makes the sale contingent upon the property appraising for at least the purchase price. If the official appraisal comes in low, the buyer has options beyond being forced to overpay. This is a standard part of most purchase agreements and is a key component of your due diligence as a buyer.

The primary benefits of including this clause are financial protection, increased negotiating power, and the ability to walk away from an overpriced purchase. However, in a seller's market, waiving this contingency can make your offer more competitive.

How Does the Appraisal Contingency Process Work?

The appraisal contingency process is triggered after a buyer and seller agree on a price and the buyer applies for a mortgage. The lender will order an appraisal to ensure the property's value justifies the loan amount. A state-licensed or certified appraiser then conducts a thorough evaluation.

The outcome of this process determines the next steps:

• Appraisal Meets or Exceeds Price: The sale proceeds normally. The lender agrees to finance the loan based on the sale price.
• Appraisal is Lower Than Price: The contingency clause is activated. The buyer can then:
  • Renegotiate the purchase price with the seller.
  • Pay the difference in cash between the appraisal value and the sale price.
  • Terminate the contract and receive a full refund of their earnest money deposit.

What Factors Do Appraisers Consider?

A professional appraiser determines market value by analyzing several key factors. According to industry standards, they assess:

• Property Characteristics: This includes square footage, number of bedrooms and bathrooms, the age and condition of the home, and any upgrades or unique amenities like a pool.
• Comparable Sales (Comps): The appraiser compares the subject property to at least three similar homes that have sold recently, typically within the last 90 days, in the same area.
• Location: The neighborhood, quality of school districts, proximity to amenities, and overall desirability of the location are critical.
• Market Trends: The appraiser considers whether the local real estate market is appreciating, stable, or declining.

When Should You Consider Waiving an Appraisal Contingency?

Waiving an appraisal contingency is a significant risk, but it may be strategically advantageous in certain situations. Based on our experience assessment, consider this option only if:

• You are a cash buyer and do not require lender financing.
• The market is highly competitive, and you need to make your offer as strong as possible.
• You are confident the property will appraise at or above the offer price, perhaps because you have substantial equity or have reviewed recent comparable sales data.

Waiving this protection means you are financially responsible for covering any appraisal shortfall out-of-pocket.

Key Takeaways for Homebuyers

An appraisal contingency is a fundamental safeguard in a real estate transaction. Including this clause protects your financial investment by ensuring you don't overpay for a property. While waiving it can strengthen an offer, it introduces substantial financial risk. Before making an offer, evaluate your financial flexibility and the local market conditions to decide if this contingency is right for you. Always review the specific terms and deadlines of any contingency with your real estate agent or attorney.