Appraisal Contingency: Defined
An appraisal contingency is a standard real estate contingency in any offer drawn up for any buyer who needs to obtain a loan to a purchase a home. It gives the buyer the right to cancel escrow without penalty if the bank appraiser determines the price of the home to be worth less than the purchase price.
It is somewhat rare for a bank appraiser to determine that a home is worth less than the purchase price. Usually, the appraisal comes in at exactly the purchase price because appraisers view what a buyer is willing to pay as great evidence of what a home is worth. Nonetheless, appraisals do sometimes come in low.
The Appraisal is Low - What Happens Next?
If the appraisal comes in at less than the purchase price, that does not necessarily mean that the sale is going to fall apart. If the buyer has the means to do so, they can pay the difference between the appraised value and the purchase price in cash and still obtain the loan. In this case, the cash down payment for the buyer increases to cover the difference between the appraised value and the purchase price.
Is There Any Reason to Remove The Appraisal Contingency?
Most buyers obtaining a loan view this contingency as vital and will not proceed without it. Only in rare circumstances does the contingency present a problem for the seller. That being said, if a seller wants to enter escrow with a buyer who is obtaining a loan, it is usually best to allow both this contingency.
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