Knowledge Mondays – Appraisal Contingencies in Real Estate Contracts

A contingency in a real estate purchase contract is a condition that is legally binding. This condition must be met before or at the time of closing so that the purchase of the contract is complete. An appraisal contingency in a purchase contract typically states that the property must be appraised at the sales price or higher. If the appraisal of the property is lower than the sales price, the buyer may walk away from the contract.

An appraisal is completed after a buyer and a seller enter into their purchase contract. In essence, the value determined by the appraisal determines the maximum amount of money that a mortgage company will lend the buyer.

To appraise a property, the lender has to retain an appraiser that will inspect the property and complete a report on the fair market value of the property. If the appraisal comes in at the sales price or higher, there should be no issues. Things become complicated when the appraisal is lower than the sales price.

As a buyer, if the appraisal is lower than the sales price, you may ask for a second appraisal. There is a possibility that the appraiser missed something of value in the home so taking a second look might increase the value of the appraisal. A buyer may also agree to provide a higher sum at the time of closing. For example, if the price of the property is $300,000 and the appraisal is for $250,000, the buyer may agree to provide the difference of $50,000. A mortgage company will only lend based on the $250,000 appraised value; thus, the buyer will have to close the gap with money from his/her own pocket at closing. A third option for the buyer is to negotiate with the seller. The seller might be able to reduce the price to meet the new appraisal value or at least reduce the amount the buyer will have to provide at closing.

If the buyer believes it is in his/her best interest to walk away from the purchase, that is always an option. A buyer may walk away from the contract if the appraisal does not meet the sales price as long as the contract contains an appraisal contingency clause. Therefore, it is crucial to always include an appraisal contingency clause in your purchase contract if you are going to be seeking financing. As a buyer, if you waive an appraisal contingency clause or decide to not include it in your purchase contract, you cannot walk away based on the results of an appraisal even if the home appraises lower than the purchase price.

If you would like to discuss your purchase contract, schedule a consultation with the experienced attorneys at Alvarez Law Group today. Call us at (786) 620-2820 or email to schedule a consultation.

*Disclaimer: this blog post is not intended to be legal advice. *

The following two tabs change content below.

Alvarez Law Group

At Alvarez Law Group, we are proud of our reputation for being a trusted advocate during insurance claims litigation and real estate transactions.

Latest posts by Alvarez Law Group (see all)