An appraisal contingency is an important clause in real estate contracts, especially for buyers. This allows buyers to back out of a deal if the property’s appraisal is below the purchase price listed in the contract. This helps protect buyers and lenders from unnecessary risk when purchasing a property.
Appraisal contingencies are especially important for properties in locations where prices are volatile.
Example: A buyer wants to purchase a condo that was listed at $300,000. Prior to closing the deal, an appraiser is sent to inspect the property. Later the appraiser claims that the value of the property is $200,000. At that point, if there is an appraisal contingency clause in the contract, the buyer can then choose to back out of the deal. Shortly afterward the buyer will have any funds they put in escrow refunded.
The appraisal is typically based on similar properties deals closed recently in the area. The location, number of rooms, and size of the property are taken into consideration along with the price.
This clause is also a big factor for lenders and mortgage providers. It is typically required as it assigns an objective value in the eyes of lenders. Typically a lender or mortgage provider will not approve a home loan for a property that has an asking price above that of appraisal value.
Appraisal contingencies can be waived by buyers in certain circumstances, although it may not be the wisest choice. Should a buyer wish to purchase a property with cash, for example, the clause can be waived.