An appraisal contingency is a clause included in purchase contracts that allows buyers to back out of an offer on a home if it is appraised for a lower value than the property’s price. Mortgage lenders execute appraisals to hone in on the exact amount they’re willing to loan to the buyer. Appraisal contingencies protect buyers from volatility in real estate markets that are volatile and subject to fluctuating prices.
How Appraisal Contingencies Work
Appraisal contingencies are clauses in home buying contracts that allow buyers to back out of an offer if the home is appraised for less than the price of the property.
It is an added protection for buyers who want a way out of a buying contract if the property is too overpriced. It gives buyers the chance to renegotiate pricing after an offer has been made. Appraisal contingencies are important to consider, especially in this current market. New York City suburbs are benefitting from the increase in demand due to the coronavirus outbreak. There is currently more demand for NYC suburban homes than supply. Naturally, prices are currently inflated due to the market being so hot. As a matter of fact, 9% of contract terminations were caused by appraisal issues last June, compared to an average of 3%.
What to Do If the Appraisal Is Low
Ultimately, somebody will need to compromise. The market has limited inventory, and it is a competition trying to find the home of your dreams.
Buyers
If the appraisal is lower than what the buyer is offering, the buyer can try to negotiate for a lower price based on the results of the appraisal. If the seller is unwilling to budge, the appraisal contingency allows the buyer to back out of the purchase contract without any negative consequences.
Sellers
If you’re selling a property and it is appraised for less than the asking price, the most common option is to renegotiate with the buyer. It is likely that the buyer still wants to make the deal work, as they have invested time and money that they cannot get back into the agreement. Sellers can also fix any problems that negatively affect the appraisal value. When the issues are fixed, the value may be reappraised at a higher value.
When to Waive an Appraisal Contingency
If a buyer is anticipating that an appraisal will not sway their decision to buy the property, they can strengthen their offer by waiving the appraisal contingency. Here are some scenarios in which waiving an appraisal contingency could be a good idea:
- Buyers are in a bidding competition; waiving an appraisal contingency can help them gain an edge with their offer
- Buyer is paying cash or cash equivalent
- Buyer plans to make a down payment in excess of 20-25% of the price
- The property is being purchased with the intent to renovate or ‘flip’
- No outside financing will be required
When You’re Ready to Go Through with the Purchase
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