You’ve just found your dream home and are finalizing your offer when your real estate agent calls with concerning news. There are two other offers going in on the property. To sweeten your offer, you may be considering waiving the appraisal contingency, promising not to walk away from the deal if the appraisal comes in below your offer price.
Loosening the stipulations in a contract can make your offer much more attractive. As of June 2022, 32% of buyers waived the appraisal contingency, with other buyers waiving, for example, inspection contingencies to likewise make their offers more enticing to sellers.
The appraisal contingency is there to protect the buyer in case of any issues surrounding your appraisal. Taking it out of your contract may make your offer pop and put you ahead of your competition. However, this approach can be risky. Not all purchases are the same, and waiving an appraisal contingency without doing your due diligence first may cost you more money down the line.
So how do you know if it’s right for you? We’ve consulted with top real estate experts with decades of experience to explain what an appraisal contingency is, how it comes into play, what options you have when a home appraises below the offer price, and whether it’s best to bake an appraisal contingency into your real estate contract.
What is a contingency?
You’ve most likely heard the term contingency thrown around quite a bit. But what exactly does it mean? Well, according to Florida real estate agent Damian Costantino, a contingency is a stipulation written into the purchase contract that needs to be met or resolved before moving to the closing table. Essentially, it’s a condition the buyer or seller has to clear up before the sale can continue. There can be any number of contingencies in your real estate contract, but here are some common ones (besides appraisal contingencies, which we’ll discuss more below):
- Inspection contingency: A buyer requests a home inspection and may use the results to negotiate a better deal or walk away.
- Financing contingency: The buyer must qualify for a mortgage loan and receive financing for the deal to continue.
- Home sale contingency: Buyer’s purchase is dependent on the sale of their existing home.
- Title contingency: The sale of the home is contingent on the title search showing no issues or concerns.
How an appraisal contingency works
The appraisal contingency is one of the most common contingencies you’ll find in a real estate contract. After all, the mortgage loan amount often depends on the appraisal, and the appraisal contingency is there to protect the buyer (and the buyer’s lender) if the appraisal amount comes in lower than the purchase price.
Here’s the deal: The bank or financial institution providing the loan requires an appraisal report to determine the actual value of the house and set the loan amount. That’s because they will only lend you a certain percentage of the home’s actual value. The appraisal is necessary to ensure that the buyer doesn’t overpay for the property and so the lender is confident that the value of the house will cover their lost investment if the buyer defaults on the loan.
“It’s a pretty valuable tool to allow the bank that is putting up the financing to understand that this property meets the criteria for that type of a loan,” says Peter Chicouris, a top real estate agent in St. Petersburg, Florida, with 27 years of experience, who’s sold 75% more single-family homes than the average St. Petersburg agent.
If the appraisal is lower than the purchase price, the contingency is there as a safeguard. In this case, “the buyer has the right to immediately have the contract terminated and have the earnest money returned to them,” explains Chicouris.
“They’ll lose the price of the appraisal, but that’s not a big expense compared to them possibly overpaying for a property.”
When you might waive an appraisal contingency
There are times when waiving the appraisal contingency can be mutually beneficial to the buyer and seller, and just like other contingencies, it has become more common recently. However, if and when you should waive it depends on your home and your financial capabilities.
First off, if you’re a cash buyer who is able to purchase the property outright or if you’re financing with a sizable downpayment (over 20%), an appraisal contingency may not be necessary unless the buyer wants to confirm they aren’t paying more than the property is worth. But if the buyer will need a mortgage loan and includes a finance contingency in their contract, it is better not to waive the appraisal contingency because the appraisal is how the loan amount is confirmed.
However, our experts agree there are exceptions. If you’re in a highly competitive market where homes are going fast and have multiple offers, waiving the contingency could strengthen your position and beat out the competition. Sellers prefer offers without an appraisal contingency because “that way they know that they’re not going to have any chances of the contract falling apart,” says Chicouris.
Essentially, if the buyer wants the house badly enough and has the means to work around appraisal concerns — especially if there are multiple offers — waiving the appraisal contingency could win them the home.
When would a particular property warrant such a waiver?
Chicouris and Costantino both advise that buyers only consider waiving the appraisal contingency if they’re working with an agent and the agent can validate the value of the property. They will help you weigh the risks versus the benefits.
Ask your agent what the consequences or cost will be if you waive the contingency and issues pop up, Costantino says. Also, ask if waiving the appraisal contingency will really make your offer stand out and get you the house. If it won’t, it might be better to keep the contingency in as an extra layer of protection. But if it will, it may be beneficial to let that stipulation go.
“It’s done all the time, especially in a place like New York, with so many offers made on the same property,” says Patrick Carmody, a real estate and insurance attorney with nearly 40 years of experience, who works as consulting counsel for New York real estate development and design firm Wheelhouse.
Another instance when waiving the appraisal contingency could be a good option is when the buyer could make a large down payment. This way, even if the appraisal is less than the offer price, the loan amount would only cover what the buyer still owes and the financial institution might still agree to the loan.
Other reasons to waive the appraisal contingency could include a superior location, the potential for expanding or building onto the property — or you simply know it’s your dream home. That said, always consult with your real estate agent and your lender before considering this option when you’re obtaining any form of financing.
What to do when a house appraises lower than the purchase price
Luckily, low appraisals don’t happen often. Chicouris says: “Out of 25 deals a month, it maybe happens once every three months.”
However, for the low percentage of homes that do appraise below the purchase price, it could lead to a delay in the sale. But if you end up in that boat, you do have options whether you have the appraisal contingency or not.
Option one: Ask for a second appraisal
If you can make a strong case that the property value is higher than the appraisal price, you can ask for a second appraisal. The lender hires the appraisal company, so the buyer can request that they hire a different appraiser for a second evaluation, providing the reasons why they believe the original appraisal is incorrect. Some of these reasons could include:
- Inaccurate information in the initial appraisal
- Less-obvious home features that were missed in the first appraisal
- Updated or improved features
- Comparable recently sold homes (comps) in the same area that were sold at a higher price than the appraisal
If the lender does not agree to arrange a second appraisal, some contingencies can include an option for the buyer to obtain another appraisal at their own expense.
As an alternative to requesting a second appraisal, the real estate agent has the right to submit a rebuttal to the appraisal company. The most powerful argument in appealing an appraisal is new, relevant comps provided by the agent. These can be used as leverage for the appraisal company to reconsider their appraisal.
“The buyer’s agent can run their own comparables and submit a rebuttal to see if maybe the appraiser made a mistake,” explains Chicouris.
Option two: Ask the seller to decrease the purchase price
Asking the seller to decrease the purchase price is a reasonable request. This is especially true if the home has been on the market for a significant amount of time; there is a likelihood that the next appraisal from a different buyer could also come in low.
For these reasons, sellers are often willing to meet in the middle and split the difference.
Option three: Pay for the difference yourself
To save the deal from falling through if none of the other options work, the buyer can make up the difference between the appraisal amount and purchase price by paying out of pocket. It’s not always the first or best option, but if you love the house and the deal is on the line, it might be worth it to you to make sure you wind up with keys in hand.
Appraisal Contingency: Frequently Asked Questions
You might still have a few lingering questions about how an appraisal contingency works and if it’s needed or not. Here’s some more information that might help you make your decision.
What is an appraisal?
An appraisal is the evaluation of a property, its location, and features — in comparison to recently sold homes — to determine its value.
Is an appraisal required to purchase my home?
If you purchase a home with cash, an appraisal is not required. However, if you are financing your purchase, your lender will usually require an appraisal to be done by an independent third party they hire. Lenders want to protect their investment from a loan default, and they will most likely want an appraisal to confirm you aren’t overpaying for your purchase.
How do I waive the appraisal contingency?
Your real estate agent can walk you through the exact process, but basically you will not include an appraisal contingency clause in your purchase contract, and instead would add what’s called an appraisal gap guarantee. That means you agree to cover the gap between the offer price and the appraised value if it comes in low — at least up to a certain point (most buyers include a limit on how much they’ll pay to cover this gap). If you have already signed your contract, there are ways to release the contingency. The process to do this should be outlined in your purchase agreement.
What are the risks of removing the appraisal contingency?
The biggest risk is that you will be responsible to make up any difference between the purchase price and the appraisal value if it comes in low. For example, if you offered $350,000 and the appraised value comes in at $330,000, you’ll need to find a way to make up that $20,000. That could mean increasing your down payment or possibly losing your financing — and your earnest money — if you’re unable to resolve the issue.
What are the benefits of removing the appraisal contingency?
The biggest benefit is making your offer more attractive. Without the appraisal contingency, there are fewer opportunities for the deal to fall through, which is always good news to the seller. If you’re certain the value of the home is at or above your purchase price, it might be beneficial to waive the contingency to beat the competition. But you should be prepared to shell out more money for the home if need be.
Are there ways to protect myself without the appraisal contingency?
The best way to protect yourself against a low appraisal is to include the appraisal contingency. But estimating what the appraisal value might be by looking at accurate and realistic comps can help give you a look into your chances of having appraisal issues. Also, increasing your down payment may give you a buffer if there are any issues.
So, appraisal contingency or no appraisal contingency?
If you are financing your home, an appraisal contingency is strongly recommended to protect yourself from a low appraisal. With it, you can walk away from the contract with your earnest money deposit or use it as a bargaining tool.
On the other hand, without the appraisal contingency, a seller could be more likely to accept your offer over others if you’re able to pay cash or put down a large down payment. There’s a lot of information to consider when deciding whether to waive your appraisal contingency or not and it’s highly situational. Take into account your location, your home’s value and recent upgrades, and how the real estate market is acting.
Most importantly, consult a trusted real estate agent. They’ll be able to give you accurate information, honest advice, and help you navigate your offer and contingencies. That way you can make an educated decision and have some peace of mind you’re doing what’s best for your hefty investment.
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