Understanding the appraisal contingency in a real estate contract
Understanding the Appraisal Contingency in a Real Estate Contract
In the world of real estate contracts, contingencies can play a crucial role in protecting both buyers and sellers from potential legal and financial issues. One of the most common contingencies is the appraisal contingency, which is designed to ensure that a property has been fairly valued by an independent appraiser. In this article, we’ll take a closer look at the appraisal contingency, how it works, and what it means for both buyers and sellers in a real estate transaction.
What is an Appraisal Contingency?
An appraisal contingency is a clause in a real estate contract that makes the sale of the property contingent on the property’s appraisal value meeting or exceeding a certain amount. In other words, if the appraisal value comes in lower than the agreed-upon purchase price, the buyer has the option (but not the obligation) to back out of the sale or renegotiate the purchase price.
The appraisal contingency is typically included in the purchase agreement for the convenience of the buyer, as it gives them a way to protect themselves from overpaying for a property. It’s important to note, however, that the appraisal contingency is not a requirement in every real estate contract, nor is it necessarily a default contingency in all real estate transactions.
How Does an Appraisal Contingency Work?
When a property is put under contract, the lender usually requires an appraisal to be conducted by an independent, licensed appraiser. The purpose of the appraisal is to determine the fair market value of the property, based on comparable sales in the area and other factors.
If the appraisal value comes in at or above the purchase price, the sale can move forward as planned. However, if the appraisal value comes in below the purchase price, the buyer has a few options:
- Request a renegotiation of the purchase price based on the appraisal value.
- Pay the difference between the purchase price and the appraisal value out of pocket, assuming the lender approves the loan for the higher amount.
- Back out of the sale altogether and potentially walk away with their earnest money deposit refunded.
The Importance of an Appraisal Contingency
For both buyers and sellers, the appraisal contingency serves an important role in protecting their interests. For buyers, it allows them to avoid overpaying for a property that may not be worth the purchase price, based on its appraised value.
For sellers, the appraisal contingency can help ensure that the sale progresses as smoothly as possible, by alerting them to any potential issues with the property’s appraised value before the sale is finalized. If the appraisal value comes in lower than the purchase price, the seller has the opportunity to renegotiate the sale price with the buyer before the sale falls through completely.
The Downsides of an Appraisal Contingency
While the appraisal contingency can be a valuable tool for both buyers and sellers, it’s important to understand that it does have some downsides. For one thing, the appraisal process can be time-consuming and can delay the sale of the property if there are any issues with the appraisal value.
Additionally, the appraisal contingency can be seen as a way for buyers to renegotiate the purchase price of the property, even if the property is in good condition and priced fairly. Some sellers may be hesitant to include an appraisal contingency in their purchase agreement for this reason, as it can put them in a lower bargaining position if the buyer decides to use the contingency to renegotiate the purchase price.
In Conclusion
Overall, the appraisal contingency is an important tool for protecting both buyers and sellers in a real estate transaction. While it does have some drawbacks, its benefits outweigh the potential negatives. If you’re considering buying or selling a property, it’s important to understand how the appraisal contingency works and whether it’s included in your purchase agreement.