Appraisal Contingency
TLDR: An appraisal contingency is the safety net that allows you to walk away from the transaction (and prevents you from overpaying) if a property does not appraise for the amount that you’ve agreed to pay for it.
Appraisals, conducted by appraisers, are a professional evaluation of a property. They also function as a bank’s way of confirming that the house you’re purchasing (that they’re lending on) is worth what you’ve offered to pay for it. “Why do you need an appraisal?” you ask. “If I’m willing to pay that price, isn’t that what the home is worth?” To that, we shrug and say “Maybe.”
Appraisers take a look at the house and what comparable homes in the area have sold for, and estimate what the house is worth. Appraisals are ordered by the lender and provide a neutral assessment of the value. They make sure that you’re not asking the bank to lend on a home that you’ve agreed to purchase for $300,000 when it’s only worth $100,000. The house is, after all, the collateral for the loan, and if it’s worth less than the amount that you paid for it, the bank risks losing a lot of money if you stop paying the mortgage.
If you're not including a financing contingency, it may still be worth including an appraisal contingency in the event that your offer exceeds what an expert deems it to be worth.
Example: An Appraisal
Here’s an example of an appraisal, which compares recently sold properties (“comparables”, commonly referred to as “comps”) to determine the value of the subject property.
What happens after the appraisal?
The answer to this question depends on whether you’ve included an Appraisal Contingency in the contract–you have a lot more options when you include the contingency. Let’s look at the potential scenarios.
