How Does an Appraisal Contingency Work and Should it be Waived


When you find a house you love and want to write an offer on, you will quickly need to decide what contingencies, if any, should be included in the offer to purchase.

If it's a hot seller's market and bidding wars are common, the more contingencies you add to the contract, the less likely you are to get the house. An appraisal contingency is commonplace in real estate contracts but should you waive it?

Waiving an appraisal may be your best choice, depending on the local real estate market. Your real estate agent should be able to provide guidance on whether removal of the clause is needed or not.

Let's examine what an appraisal contingency is and how it works.
Appraisal ContingencyDeposit Photos

What Are Real Estate Contingencies?

A contingency is a clause in a contract that provides a means for a buyer to escape the contract if the condition is not met or successful. Most real estate contracts have two standard contingencies.

The two most common contingencies are home inspection and mortgage financing. So, should a buyer have a problem with the house's condition or can't get financing, they can withdraw from the contract.

The third, slightly less common contingency is an appraisal contingency. The appraisal contingency clause will state that the appraisal has to be at or above the purchase price.

All three of these contingencies protect a home buyer in the event they are not satisfactory or, in the case of financing, are successful in getting funding.

A buyer can escape the sale without penalty and have their earnest money deposit returned to them. When all the contingencies are satisfied, a real estate agent will change the listing status to pending in the multiple listing system.

What is an Appraisal Contingency?

Many first-time buyers will ask a real estate agent what are appraisal contingencies. The appraisal contingency will protect home buyers in the event that the home appraisal does not come in at or above the agreed-upon sale price.

An appraisal contingency will become part of the offer to purchase contract. It could be in the main body of the contract or an appraisal contingency addendum.

If the appraisal from the bank falls short, the contingency allows the buyer to cancel the contract instead of paying the difference out of pocket. For example, if you are purchasing a home for $600,000 and the appraisal comes in at $575,000, you would be able to terminate the sale.

If the appraisal contingency didn't exist, you may have to pay the difference out of pocket by increasing your down payment. Most of the time, situations of a low appraisal are resolved either by the seller lowering the price, the buyer coming up with additional funds, or a combination of the two.

What is a Real Estate Appraisal?

An appraisal is a professional opinion about the value of a property.

Mortgage lenders hire an independent third-party appraiser to value the property. Mortgage lenders use appraisals to determine the amount of the loan they can extend to a borrower.

The appraiser visits the property to understand several factors, including the square footage, condition, age, amenities, location, and lot utility. The appraiser will then compare these factors to other similar properties in the area that have sold.

The appraisal will get adjusted upwards or downwards based on comparable sales. It is similar to what a real estate agent does when they provide a seller with a comparable market analysis to establish an asking price for the home.

Both are methods for determining real estate market value.

In Hot Seller's Markets, Waiving an Appraisal Contingency May Be Necessary

When real estate markets favor sellers, waiving an appraisal contingency may be required to get your desired house. For the last few years, there has been more buyer demand than there is available housing.

With an excess of buyers bidding wars have been commonplace. In order to make their offer more attractive, buyers would waive the appraisal contingency. Competing with other buyers who were doing the same or even waiving the financing altogether would be necessary.

Some buyers will even add an appraisal gap clause that states they will cover any shortfall in the appraisal up to a certain amount of money.

In Buyer's Real Estate Markets, Appraisal Contingencies Become More Common

When there are more buyers than sellers and market values drop, appraisal contingencies are expected. Unlike strong sellers' markets, it becomes relatively standard when the market favors buyers.

Keep in mind that appraisal contingencies are not the same as mortgage contingencies.

How Long Will The Appraisal Contingency Take to Be Completed?

Usually, the appraisal contingency will be completed around two to four weeks after the offer to purchase has been signed. It may be sooner or later, depending on the lending volume taking place at the time.

Spring markets tend to be busier around the United States than in winter. The refinance market can also impact how quickly an appraiser can complete their work.

Who Pays For The Real Estate Appraisal?

Home buyers typically pay for the home appraisal. The payment is part of a buyer's closing costs with the lender. You will see the appraisal fee noted as part of the real estate settlement statement. Many lenders will ask you to pay the appraisal fee upfront.

Final Thoughts on Appraisal Contingencies

Appraisal contingency removal should be based on market conditions and your financial situation. No appraisal contingency means you will be at risk of having to come up with additional funds to satisfy the mortgage lender.

In strong seller markets, you might need to waive the appraisal in order to get your dream home. Whether buying or selling a home, it is essential to understand how appraisal contingencies work.

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Bill Gassett is an avid writer for numerous real estate topics including finance, mortgages, moving, home improvement, and general real estate. His work has been featured on numerous prestigious real estate publications.

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