🔎 What is an Appraisal Contingency?
An appraisal contingency protects buyers from paying more than what a home is worth. If a lender’s appraisal comes in lower than the offer price, a buyer can withdraw their offer without any penalties.
Appraisal definition | How appraisal values work | What is an appraisal contingency? | Waiving an appraisal contingency | Appraisal gaps | Options for dealing with a low appraisal | When can sellers back out? | Costs, who pays, and timeline
Contingencies are clauses in a home sale agreement that protect the buyer in case certain conditions are or aren’t met. For example, if a home inspection finds serious problems with the home, or if the buyer’s financing falls through, the right contingencies allow a buyer to walk away from the deal without losing their earnest money.
An appraisal contingency protects the buyer if the home appraisal finds that the property is worth less than the price the buyer and seller have agreed upon. If this happens, the appraisal contingency gives the buyer options – including the ability to walk away from the deal.
Most lenders require appraisals, but in some cases, it may be necessary or preferable to waive your appraisal contingency. Before making a big decision about one of the biggest financial transactions of your life, we recommend speaking with a qualified local real estate agent.
Our friends at Clever Real Estate have a licensed concierge team who are ready to help you navigate your next real estate transaction. They can match you with qualified real estate agents who can offer expert advice — and with Clever, you’ll even get cash back after closing in every state that allows rebates!
What Is a Home Appraisal?
A home appraisal determines a property’s fair market value and is performed by a licensed or certified home appraiser. Mortgage lenders order appraisals to make sure the home is actually worth the amount of money they’re lending the buyer.
Appraisals are a big deal in the home buying process. They can make, break, or delay a sale, especially if one comes in low. According to the National Association of Realtors, 22% of delayed contract settlements are due to appraisal issues.
» Read More: How long does an appraisal take?
What Determines the Appraisal Value of a Home?
Home appraisers typically look at six aspects of a home to determine its fair market value:
- Comparable nearby homes that recently sold. This is one of the most important data points used in a home appraisal, as it gives the appraiser a direct comparison for the home being appraised.
- Neighborhood. The appraiser looks at home values of properties in the immediate vicinity, as well as desirability factors like parks, walkability, noise level, and mature trees.
- Local market trends. If your local market shows clear trajectories, the appraiser will take this into account.
- Lot size. Homes on larger lots are worth more than identical houses on smaller lots.
- Condition. The appraiser will consider a home’s age and condition.
- Materials and amenities. The appraised value will consider high-end finishes and appliances, or unique home features like swimming pools or landscaped outdoor space.
|🤔 Why Do I Need a Home Appraisal?
Most lenders require an appraisal as part of the mortgage approval process to make sure the market value of the home warrants the amount of the loan. Many government loans also require an appraisal. So unless you’re paying in cash – or meet another exception – you’ll probably have to get an appraisal.
What Is an Appraisal Contingency?
An appraisal contingency is a common provision in a purchase contract that protects buyers from paying more than a home’s fair market value. If a home’s appraisal price is lower than the sale price, the buyer can terminate the offer without penalty.
Appraisal contingencies are almost always included in contracts for buyers who are using a mortgage to finance their home purchase.
Like most contingencies in a home purchase agreement, the appraisal contingency protects the buyer from getting trapped in a bad or unfair deal. For example, inspection contingencies allow the buyer to back out (or negotiate repairs) if the home inspection uncovers serious problems with the home, and financing contingencies allow the buyer to walk away from the deal if they’re unable to secure a mortgage.
While low appraisals are relatively uncommon, they do happen – especially in a hot market where buyers are offering significantly above the listing price. The appraisal contingency is your safety net so that you’re not obligated to purchase the home and fill the gap between your loan and the purchase price you’ve already agreed to.
Appraisal Contingency Example
The exact wording of an appraisal contingency varies by contract. Here’s an appraisal contingency example from a California purchase contract:
|“Appraisal contingency and removal: This agreement is (or, if checked, ☐ is NOT) contingency upon a written appraisal of the property by a licensed or certified appraiser at no less than the specified purchase price. If there is a loan contingency, buyer’s removal of the loan contingency shall be deemed removal of this appraisal contingency…. If there is no loan contingency, Buyer shall in writing remove the appraisal contingency or cancel this agreement within 17( or__ days) after acceptance.”|
In this example, checking the box indicates the purchase agreement is not contingent on an appraisal. Sometimes checking a box on the purchase contract is enough for waiving the appraisal contingency. But in California, sellers must also fill out a contingency removal form.
What About Home Value Estimators?
Home value estimators are a good way of getting a ballpark price for your home, but they are not a substitute for an actual appraisal. Home value estimators are good for buyers and sellers who want to get an idea of what a home is probably worth on the open market.
When Does Waiving the Appraisal Contingency Make Sense?
Most buyers obtaining a loan view this contingency as vital and will not proceed without it.
However, there are few situations where you might consider waiving the appraisal contingency to create a more attractive offer for the seller – especially in a competitive market.
You’re Buying in Cash
Having no appraisal contingency as a cash buyer means you believe the home is worth the purchase price.
Cash buyers can skip the appraisal and the contingency since they’re not reliant on a loan. In 2022, a year with a high level of cash buyers, 28% of buyers waived their appraisal contingency.
You’re Prepared to Pay More Up Front Than You Expected
Your lender will only lend you the amount on your purchase contract, but maybe you’re ready to add an extra $10,000 or so to your down payment if the appraisal comes in low. This is a risk, but may be an acceptable risk if you have plenty of extra cash on hand.
Your Lender Grants an Appraisal Waiver
Lenders will sometimes grant an appraisal waiver if the home was recently appraised – usually within the last year – and there have been no significant market changes. In this case, your loan won’t be dependent on a new appraisal so a contingency isn’t necessary.
|⚠️Remember: When you waive the appraisal contingency, you’re agreeing to pay the home’s contracted price, even if the appraisal comes in low. Make sure you’re financially able to afford the home before you waive the appraisal contingency.|
What Is an Appraisal Gap?
If there’s a difference between the sale price and the appraised value, you’ve got what’s called an “appraisal gap.”
If the appraised value is higher than the sale price, you’re getting a great deal. If the appraised value is lower than the sale price, you have some decisions to make about how to move forward.
What Are My Options If the Appraisal Comes In Low?
Option 1: Pay The Difference
The buyer can make up the difference between the appraised value and the sale price in cash.
If you decide to go this route, you’ll simply add that money to the down payment, and your mortgage will be based on the appraised value.
Option 2: Renegotiate The Price With The Seller
If the seller is motivated, they might agree to lower the sale price to the appraised value.
So, what would motivate a seller to drop their price?
Most sellers want to earn the maximum profit from their home sale, but for some, timing is more important. For example, a seller might urgently need the cash from their home sale, or they might be facing a tight timeline due to an out of state job or impending divorce.
But negotiating effectively can be challenging. In a recent survey of 1,000 homeowners, our friends at the Clever Data Center found 46% wouldn’t be comfortable negotiating on their own.
The best way to protect yourself against a tricky appraisal situation is to have a great real estate agent on your side. Our friends at Clever Real Estate offer a free, no-obligation service that can match you with top-rated real estate agents who know how to negotiate in your local market.
Plus, Clever helps home buyers secure cash back in all states that allow rebates — which can help bridge any appraisal gap you may be facing.
Option 3: Terminate The Offer
If you can’t (or don’t want to) make up the difference in cash, and the seller won’t budge on the sale price, your appraisal contingency allows you to walk away from the deal with your earnest money.
If you have no appraisal contingency but still want to back out of the deal, you will likely lose your earnest money.
However, if you have a loan contingency, and the lender refuses to fund the loan due to a low appraisal, your loan contingency will protect you.
Can a Seller Back Out If the Appraisal is High?
Technically, no — a seller can’t back out of a sale because the appraisal came in high.
However, they might have other opportunities to back out of the sale. For example, if the home inspection leads to negotiations for repairs, the seller could use these issues as a pretense to back out of the deal.
How Much Does an Appraisal Cost?
According to HomeAdvisor, the average cost of a single-family home appraisal is around $350.
However, homes that are older, complex, have multiple units, or are larger than average, may cost more to appraise, since the appraiser will have to spend more time examining it. Home appraisal prices can also vary geographically with a tendency to be more expensive in big cities.
Who Pays for an Appraisal?
Typically, the buyer pays for the appraisal. This is because the appraisal is used by the buyer’s lender. The lender will hire the appraiser of their choice and charge the mortgage applicant.
How Long Does an Appraisal Take?
A typical on-site, in-person home appraisal usually takes 30-60 minutes. Larger or more complicated properties may take several hours. The appraiser will generally finalize and submit their official appraisal within two weeks.
Keep in mind that, if you’re in a very busy market, there may be a waitlist to have your home appraised.
How Long Is an Appraisal Good For?
In general, a home appraisal is valid for 30 days to six months, depending on local market conditions and the condition of the home.
Appraisals on newly constructed homes will usually be accepted for longer than appraisals on an existing home. And in a very busy market, an appraisal may not be accepted after as little as a month has passed.
👋 Next steps: Talk to an expert!
FAQs About Appraisal Contingencies
What is an appraisal gap?
An “appraisal gap” occurs when there’s a difference between the home’s sale price and the appraised value. Learn what to do if the appraisal is lower than the sale price.
How much does an appraisal cost?
The average cost of a single-family home appraisal is around $350 — but can be higher for homes that are older, complex, have multiple units, or are larger than average. Home appraisal prices can also vary geographically and can be pricier in big cities. Learn more about appraisal costs, timelines, and who pays.
How long is an appraisal good for?
In general, a home appraisal is valid for 30 days to six months. Appraisals on newly constructed homes will usually be accepted for longer than appraisals on an existing home. And in a very busy market, an appraisal may expire after just one month. Learn more about how appraisals work.
What is an appraisal contingency?
An appraisal contingency allows the buyer (and their lender, if they have one) to make sure a home is worth the purchase price. If a home does not appraise for the purchase price, the appraisal contingency allows for the buyer to pull out of the deal without penalty. Learn more about appraisal contingencies.