If you’re a potential home buyer or seller, you might come across the term “appraisal contingency” in your real estate contract. Here’s a look at appraisal contingencies and how they can affect your home sale.
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What is a contingency?
To start with the basics, if a home buyer makes an offer with a contingency, that means the home sale will only go through if certain conditions are met. A contingency allows buyers to back out of the sale if something goes wrong without losing their earnest money deposit. There are a few types of contingencies in real estate:
-- A financing contingency, also known as a loan contingency, means that if the buyer has trouble getting a mortgage for the home purchase, they can drop out of the contract with no penalty.
-- A home sale contingency lets existing homeowners make an offer on a new home that is contingent on selling their old house, so they can avoid overlapping housing costs.
-- An inspection contingency gives buyers the ability to negotiate repairs or cancel the contract based on the results of a home inspection.
-- An appraisal contingency states that if the appraised value of the home is lower than the purchase price, the buyer can negotiate the purchase price or walk away at no cost.
How does an appraisal contingency work?
Now we’ll dig a little deeper into the mechanics of an appraisal contingency. If a buyer is getting a mortgage to help them purchase a home, their lender will only do so if the property is worth their investment.
To ensure they aren’t lending more than what the home’s worth, the lender will ask an appraiser to determine the value of the house. The lender will only give the buyer a mortgage up to the appraised value of a home, regardless of the purchase price. An appraisal contingency protects the buyer if the appraisal comes out low, and they can’t get enough financing from their lender.
Example: Let’s say a buyer and seller agree on a purchase price of $200,000, but the appraisal comes in at $190,000. The buyer’s lender will not give a mortgage that covers this $10,000 difference. If the buyer has an appraisal contingency, they have the option of canceling the purchase contract without losing their deposit.
What happens during an appraisal
The buyer’s lender will typically hire a third-party company to perform the appraisal. The appraiser will evaluate the property based on its general condition, location, and comparative sales to determine the home’s fair market value. The whole process can take 2-4 weeks, from the lender ordering an appraisal to the appraiser submitting their report. The actual in-home visit takes anywhere from 15 minutes to a couple of hours, depending on the property.
Should buyers waive their appraisal contingency?
If you’re a home buyer looking to make a competitive offer, an appraisal contingency could hold you back. That’s because sellers usually prefer contingent-free bids that give them more certainty that the sale will go through without a hitch. Some buyers in hot real estate markets choose to waive their appraisal contingency to get a competitive edge. However, for most of us, this might just be too risky of a move.
Remember, if you waive your appraisal contingency, you agree to pay the contracted price of the home’s sales price, even if your lender isn’t willing to lend you the full amount. If you don’t have the cash on hand to cover the difference, you’ll be forced to break the sales contract and forfeit your deposit, which could mean losing thousands.
The bottom line
Contingencies, regardless of the kind, present a sort of dilemma. They help buyers ensure that their investment in their potential new home is safe and secure. However, for sellers, a contingent contract means there’s a good chance that the sale could fall through for many reasons.
So is it possible for buyers and sellers to avoid contingencies with no downside? If you work with Orchard, you can get many of the benefits of a non-contingent contract. For homeowners looking to buy their next home, we guarantee that your current home will sell within 120 days. That way, you can make a competitive offer without a home sale contingency on your new home without the risk.
For those looking to just sell, we’ll give you a cash offer on your home, so there’s no chance of the sale falling through due to financing contingencies. That peace of mind can help you shop for your next home without worrying about selling your current one. Interested in learning more about Orchard? Start by finding out how much your home is worth: