Appraisal contingencies: What is it & why is it important?

Once a home seller has accepted an offer to purchase their property, the end of the home selling journey may feel close. 

However, the mortgage lender of the homebuyer may appraise the property for a lower amount than the purchase price. If this happens, it’s vital to examine the terms of the appraisal contingency in the purchase contract. 

Are appraisal contingencies common?

Contingencies are put in place to protect both buyers and sellers in real estate exchanges. An appraisal contingency is very common to find on the buyer’s side of the purchase agreement. It protects homebuyers if their lender's appraisal comes back lower than the amount needed to purchase the home. 

Why would a seller not want an appraisal contingency?

Dropping an appraisal contingency clause can be very beneficial to home sellers, as it increases the chances of the purchase decision going through. 

This option can be tricky for homebuyers as it leaves them unprotected if the appraisal comes back lower than expected, but may make their offer more appealing in a competitive seller’s market.  

Can a seller back out after a low appraisal?

If the appraised value of a home is less than the listing price, the seller has the option to back out of the deal if they feel they would end up losing money. 

The seller doesn’t have to lower the price, however, if the homebuyer has an appraisal gap guarantee, they have agreed to cover the balance with their own funding if the appraisal comes back low. 

Working with your real estate agent, home buyers and seller’s can create and examine the appraisal contingency to make sure it’s best fitting their home selling and buying standards.