When buying a home most people want to know they are getting a fair deal. One of the ways to ensure that happens is by having an appraisal contingency in an offer to purchase agreement.
An appraisal contingency will state that the property needs to appraise for at least the sale price. If it does not the buyer can terminate the sale.
So, if your contract has an appraisal contingency and it does not come in at or above the purchase price, you can cancel the contract.
However, you may not want to terminate the sale. Do you know what your options are at this point? We will take a look.
What is a Home Appraisal?
When getting a mortgage loan from a financial institution they will usually have a requirement for conducting a real estate appraisal. Lenders do this to ensure the asset they are lending against has the appropriate loan to value.
Lenders do not want to get stuck with a home that is not worth what they are lending. To ensure this does not happen lenders will hire an independent real estate appraiser who will take a look at the property.
Appraisers will walk through the subject property taking notes on many aspects including the square footage, location, age, condition and amenities.
They will then look for other similar properties that have sold to arrive at fair market value. Adjustments are made from property to property to get a conclusion on value.
The appraisal will determine the home's value, which will either be above, below or at the contracted price.
If the house does not appraise for the contracted price, some buyers can still obtain financing while others cannot.
It is not surprising when a home does not appraise buyers and sellers are not always sure what happens next.
Can a buyer cancel the real estate contract or are they locked in? Will the seller need to reduce their price in order for the sale to continue?
Let’s go over what can happen when a home doesn’t appraise.
Understanding How Contingencies Work in Real Estate Contracts
Can a buyer just cancel if the home doesn't appraise for the sale price? It depends on what contingencies were in the real estate contract. Does the agreement include an appraisal contingency? How about a financing contingency?
If there are no contingencies at all a buyer could be out of luck.
Having an Appraisal Contingency Benefits Home Buyers
As already mentioned, an appraisal contingency gives the buyer the right to terminate the sale. Buyers need to notify sellers in writing by the date that has been agreed to in the contract. If they do not notify during this time frame, the contingency becomes null and void.
The Mortgage Contingency is Crucial
A mortgage contingency clause will state that a buyer will be trying to obtain a mortgage for a certain amount of money by a certain date. If they are not able to procure financing in that agreed-upon time frame they must notify the seller in writing or ask for an extension.
When a house doe not appraise, it does not automatically mean a buyer will not get their mortgage commitment and can terminate the contract. Some buyers have the ability to come up with additional funds that will ensure the lender will grant the loan.
On the other hand, if a buyer does not have the ability to do so the contract can be canceled. Not getting a mortgage is a common reason why homes come back on the market.
Waiving The Appraisal Contingency in a Seller's Real Estate Market
In a competitive real estate market where there are more buyers than sellers, it is not uncommon for home buyers to waive their appraisal. It is done to make their offer stronger in the eyes of the seller.
When there isn't an appraisal contingency a buyer cannot cancel and will be forced to make up the difference financially if there is an appraisal gap.
A buyer would be in breach of the contract and would lose their earnest money deposit if they did not comply.
Options When a House Does Not Appraise
Depending on the real estate market and the contingencies in the contract, there are a few things that can happen when a home does not appraise.
If it is a buyer's market and a house does not appraise for the purchase price, the seller could decide to lower the purchase price to the appraised value.
Buyer Comes Up With The Difference
In a seller's market, the exact opposite is likely to occur. Buyers often find themselves coming up with additional down payment funds to satisfy the lender in the event of a low appraisal.
Negotiate a Compromise
Sometimes when a market neither heavily favors a buyer or seller, there will be a meeting of the minds. A seller might drop the price a little bit and the buyer may increase their down payment. A combination of these things is done to satisfy the lender.
Challenge The Appraisal
Every now and then there can be a blatant mistake in a real estate appraisal that could negatively impact the appraised value. When this happens it's possible to challenge the appraisal. When an appraiser makes an error that influences the appraisal amount it could be changed.
Final Thoughts on Appraisals
Whenever you're purchasing a home, it is essential to understand the legalities of what's being agreed to. If you are unsure, it is advisable to consult with a local real estate attorney.
It is always a good idea to have legal representation when making a purchase as significant as a home. It is typically one of your largest investments. It will be well worth the money spent to have that peace of mind and protection.