The first thing to tackle is what an appraisal contingency is, and where it is found. An appraisal contingency is language found in the contract that gives the buyer the ability to ask the seller to reduce the price in the case of a low appraisal or terminate the contract in the case that the seller and buyer cannot come to an agreement on price. So, now where is it found? Most of the time, the only appraisal contingency will be found in the financing contingency. In the case of an all cash transaction, the appraisal contingency is a stand-alone form in the contract package. There are times that agents will have more than one appraisal contingency in a contract. They may put the stand alone appraisal contingency in a contract package that already has an appraisal contingency in the financing contingency. Some agents do not realize there is one in many of the financing contingencies or they are under the impression that the stand alone appraisal contingency gives the buyer more protection. One appraisal contingency in a contract is sufficient and having two appraisal contingencies could hurt the buyer, not help them. One may have language in it that would cancel out the other. I can think of a specific example, however, for the sake of simplicity and brevity, I will not include it here.
As a matter of practice, you should not use the appraisal contingency as your only protection from paying too much for a property. Your agent should show you other sales that have sold in the area and other listings currently on the market to give you a good understanding of the market value of the property. If you and your agent have done a good job of previewing homes and going over the market data, you should have a good feel for what you are willing to pay for the house. Appraisers are like every other type of professional. There are good ones and bad ones. As a former Certified Appraiser, I am sometimes appalled at some of the appraisals I have seen.
Another thing to keep in mind when it comes to the appraisal contingency is that there are specific time frames which you must act within. If the appraisal is not completed in a timely fashion, your agent may not have the opportunity and you lose the right to request the seller to reduce the sales price. And, unfortunately, if your agent is not mindful of the time frames spelled out in the appraisal contingency, you lose your right to ask the seller to reduce the sales price.
In the case that the appraisal is done and your agent acts accordingly within the time frames spelled out in the contract, and the appraisal has come in low, now what? At this point the sales price becomes negotiable. There are many moving parts to these negotiations. The seller can reduce the price, the buyer can bring more money to closing, the agents can cut part of the commission, the seller may reduce the closing costs, etc. The key thing to remember is that if you and the seller cannot come to an accord in regards to the sales price, your only remedy at that point is to terminate the contract. Remember that there is a specified time frame that you have to operate in to do this without putting your earnest money in jeopardy.
As mentioned above, don’t rely on the appraisal as your only protection against paying too much. By the time the appraisal is complete, you will have most likely paid for an inspection fee and an appraisal fee. At this point, you will have already invested between $600 and $1000 in most instances. So, the goal should be to go into a transaction with a good idea of what the home is worth and what you are willing to pay.
As with most things related to real estate transactions, the details are important and must be managed. The contract and contingencies have to be filled out correctly, and the agents must act within the time frames spelled out in the contract. A good agent will stay on top of these, however, there is nothing stating that you cannot write down these dates yourself to ensure your agent’s compliance.
Please feel free to post any questions you have regarding this or any comments you have! Thank you so much for investing the time to read this.