Last Updated on 09/11/2017 by GS Staff
[otw_shortcode_dropcap label=”A: ” size=”large” border_color_class=”otw-no-border-color”][/otw_shortcode_dropcap] An appraisal contingency is verbiage that is typed in a purchase agreement. It states that the property being purchased must appraise for a certain value (usually the purchase price) or the buyer can get out of the contract or renegotiate. For example, if the purchase price is $200,000 and the appraisal comes in at a value of $175,000, the buyer would have the ability to exit the contract or renegotiate at a lower purchase price.
Of course, the purchase agreement must contain the appraisal contingency in writing in order to be a valid contingency. You should review the purchase agreement to make sure it contains an appraisal contingency to your liking if you wish to have one listed in the agreement. You may want to have your attorney review the purchase agreement before you sign it to ensure everything is in line.
Why Have An Appraisal Contingency?
The buyer typically obtains the appraisal after the purchase agreement is executed. The buyer is not 100 percent certain of the value of the property until the appraisal is received. An appraisal contingency is used to protect the buyer from purchasing a property that is valued lower than the purchase price. In many cases, it just does make sense for a buyer to purchase a property for more than it is valued.
Handling A Low Appraisal
An appraisal contingency gives the buyer a chance to move on from the purchase; however, buyers often want the loan to work even with the lower appraisal value. Here are some things to consider below when the appraisal comes in low.
The buyer’s lender will only lend based on the lower of the purchase price or appraisal value. The buyer’s loan may be temporarily qualified based on the purchase price pending the appraisal that is expected to at least meet the purchase price. When the appraisal comes in low, the buyer’s loan needs to be re-qualified based on the low appraisal value. Several scenarios could play out once the low appraisal is received by the lender. Here are a few:
- Lower The Purchase Price: The seller may consider lowering the purchase price to meet the appraisal value. This often happens when the seller realizes that the their home is not truly worth what they are selling it for. However, sellers often have an anticipated sales price in their head and may not be willing to be flexible.
- Buyer Brings More Cash: The lender may allow the buyer to compensate for the low value by coming up with the difference between the purchase price and the appraisal value. The buyer is essentially paying more for the property than it is worth, which is not typically a good idea.
- Get A Second Appraisal: Some lenders may allow another appraisal to be ordered if the buyer or seller is willing to pay for it. The lender may evaluate this new appraisal against the original appraisal to determine which appraisal best supports the value. The best case scenario is that the new appraisal comes in at least meeting the purchase price and the lender is willing to accept this value. Keep in mind that appraisals are typically a few hundred dollars. You might want to think carefully before ordering a new appraisal if you will be responsible for paying for it.