You found your dream home and now you are about to make an offer. Before you do, you should know the importance of including an appraisal contingency in your offer. Without it, you could find yourself stuck buying a home that isn’t worth the amount you bid.
Understanding the Appraisal Contingency
First, we want you to understand the appraisal contingency so that you can use it for all that it’s worth. When you include this contingency in your contract, it gives you a certain amount of time to hire an appraiser and pay for the appraisal report.
The appraiser will go out to the home and evaluate its condition, location, and upgrades. The appraiser will take pictures of the inside and outside of the home. He will take measurements and look at the condition of the home and any notable upgrades. The appraiser will then look for comparable sales in the area that sold within the last 6 months and are located within a few blocks of the subject home.
The appraiser will then complete an appraisal report complete with the market value of the home. The lender wants to see the market value greater than or equal to the price you agreed to pay for the home. Without an appraisal contingency, you have no wiggle room on the contract should the appraiser decide the home is worth less than you offered.
If this happens, you could be on the hook to pay the difference between the appraised value and the price you bid in cash. That could be a large chunk of money.
This won’t be the case if you have an appraisal contingency, though. Keep reading to learn how it can help you.
You Have a Way Out of the Contract
When you sign a purchase contract, it’s a binding agreement. The seller can take legal action against you if you back out of it. But, if you have an appraisal contingency in the contract and the appraiser doesn’t think the home is worth the amount you bid, you have a way out of the contract.
If you were to back out of the contract without the appraisal contingency, you would probably lose your earnest money. The seller has the right to keep the money you put down ‘in earnest’ because you violated the contract’s terms. With the contingency in place, you have a certain amount of time to get the appraisal done and review the report in order to make a decision.
You Have Evidence to Help you Renegotiate with the Seller
If the appraisal comes back at a value lower than you bid, you can always go back to the seller and re-negotiate the deal. Some sellers won’t be willing to budge. At that point, if you have the contingency, you can just back out of the contract.
If the seller knows that you have the appraisal contingency and that you can back out of the contract, he/she may be more willing to negotiate the price of the home. If the seller refuses to negotiate or you can’t agree on a new price, you still have the right to back out of the contract with your earnest money in hand.
You Won’t be on the Hook for a Large Sum of Money
Like we said above, if the appraiser decides the home is worth less than you bid, the lender will base your loan amount on the appraised value. This means that you’ll have to pay the difference between the appraised value and your contract price in cash.
If you have an appraisal contingency though, this won’t happen. If you don’t want to pay more for a home than it’s worth (who would) then you can back out of the contract. This gives you the chance to keep your earnest money and find another home that is worth the amount that the seller is asking for it.
The appraisal contingency is just one of the important contingencies you should have in your purchase contract. Make sure that you consult with a real estate attorney before executing a purchase contract so that you have the right contingencies in place.