Appraisal contingency

Definition

An appraisal contingency is a clause in a real estate contract that allows a buyer to back out of the agreement if the property is appraised for less than the purchase price. This provision protects buyers by ensuring that they are not obligated to proceed with a purchase that exceeds the property's market value. If the appraisal comes in low, the buyer can negotiate repairs or price adjustments, or ultimately decide not to move forward with the deal.

5 Must Know Facts For Your Next Test

1. Appraisal contingencies are particularly important in competitive markets where bidding wars can drive prices above fair market value.
2. If an appraisal comes in lower than expected, buyers may have to negotiate with sellers to either reduce the price or cover the difference out of pocket.
3. Some lenders require appraisal contingencies as part of their financing process to ensure that they are not lending more than the property's worth.
4. In some cases, buyers may waive the appraisal contingency to make their offer more attractive, but this increases their risk if the property appraises low.
5. An appraisal contingency typically has a set time frame, which means buyers must act quickly if they want to back out or negotiate after receiving the appraisal report.

Review Questions

• How does an appraisal contingency function within a purchase agreement and what implications does it have for buyers?
  • An appraisal contingency functions as a protective measure within a purchase agreement that allows buyers to back out if the property is appraised for less than the purchase price. This means that if a buyer finds themselves in a situation where the appraisal does not match their expectations, they have leverage to negotiate or withdraw from the deal without financial penalties. It ensures that buyers are safeguarded against overpaying for properties based on inflated market prices.
• What might be some potential outcomes for buyers if they encounter a low appraisal during their home buying process?
  • If buyers encounter a low appraisal, they face several potential outcomes. They can renegotiate with the seller to lower the purchase price to match the appraised value. Alternatively, they might ask for repairs or improvements to be made before proceeding with the sale. If neither of these options works, and they have an appraisal contingency, buyers can choose to walk away from the deal without financial repercussions. This creates critical negotiation dynamics between buyers and sellers.
• Evaluate how appraisal contingencies impact market behavior and strategies in real estate transactions.
  • Appraisal contingencies significantly influence market behavior by affecting how buyers make offers and how sellers respond. In competitive markets, buyers may choose to waive this contingency to make their offers more appealing, thereby increasing their risk of overpaying if appraisals come in low. On the flip side, sellers may adjust their pricing strategies based on recent appraisals of comparable properties. This creates a cycle where both parties must navigate carefully to balance valuation perceptions against market realities, impacting overall transaction strategies.

Related terms

purchase agreement:

A legally binding contract between a buyer and seller that outlines the terms of a real estate transaction.

financing contingency:

A clause in a real estate contract that allows the buyer to withdraw from the deal if they are unable to secure financing for the property.

market value: The estimated price that a property would sell for on the open market, based on comparable sales and current market conditions.