The Appraisal Contingency – A Safeguard to Borrow Only What a Property Is Worth

For the last several years – in what was a white-hot seller favorable Norton Virginia market – it was common practice for buyers to waive the appraisal contingency. With the market shifting and rebalancing between buyers and sellers, appraisal contingencies are back! With that comes questions about what it actually is, what it means and how a buyer can leverage it to their advantage. In this blog, I’ll walk you through what buyers should know when it comes to this all-important contingency. To do so, I’m going to break it down into two parts:

The Appraisal

If you’re getting a loan to purchase a property, your lender will require an appraisal on the property.  Lenders want to make sure that they’re not offering financing on an agreed sales price that is higher than what the property is actually worth.  Your financing and down payment is predicated on the lower of the purchase price or the appraised value. That opinion of value is determined by an objective third party, an appraiser. Once you’re under contract, your loan officer will request that an appraisal be completed.  This involves the following by an appraiser:

  • A visit to the property.  This is an in-person walk-through of the property by the appraiser which includes taking measurements and photos.
  • A review of the tax record, including the tax assessed value, interior/exterior square footage and sales history.
  • A deep dive into comparable like-kind sales of the last 6 months (and not beyond) in the immediate neighborhood of the property. If the property is in a condo or townhouse complex, the appraiser will look there first. Only comparables that have closed and updated in the MLS can be used in the appraisal report (I.e., not properties that are under contract).
  • A consideration of market conditions, the location (at a micro and macro level) and any particularities of the property (e.g., backing onto public land, walkable to public transport).

Sometimes, the listing agent of a property will try to provide the most up-to-date information to the appraiser to inform their analysis but, in general, the appraiser’s review is done with complete independence.  That review will typically take at least a week, from the date an appraiser receives the request for an appraisal to their issuance of the report to the lender. It should be noted that many lenders will say that they need at least 21 days to complete an appraisal.  That it is “industry standard” to require that much time.  This is not entirely true.  What can take that extra one to two weeks is the lender’s own internal appraisal and validation review process. 

Having a short appraisal contingency timeframe (e.g., 10 or 14 days) can be an important aspect of an offer, especially when a buyer is offering below list price. Hence, I recommend strongly working with lenders that can complete the appraisal process in that shortened timeframe. Depending on the lender, they may offer a rush fee to expedite receipt of the completed report inside 10-14 days.

The Contingency

The definition of contingency is “a contingent event or condition; such as an event that may but is not certain to occur.”  In this case, the event that is not certain is that the appraised value of the property will be equal to or greater to the sales price agreed to by the parties and set for in the sales contract.  If this event does occur, then the appraisal contingency is satisfied and the buyer simply issues a signed notice to the seller stating that the contingency is removed.  Often buyers ask me whether the seller “gets to know the price” at which the property appraised.  The short answer is no.  A seller and their agent have no right to see the buyer’s appraisal report. Plus, it may actually be upsetting to the seller if they find they agreed to a sales price below the appraised value.

If an appraisal comes in with an appraised value below the agreed sales price, the buyer may not remove the contingency (unless they are willing to cover with their own funds the delta between the appraised value and the agreed sales price).  The buyer will instead request that the seller agree to a sales price at the appraised value.  It’s possible that the seller refuses such a request – though in this market that would be short-sighted – and holds the line on the previously agreed contract price.  In that case, the buyer has the right to void the contract and receive back in full their earnest money deposit.  The buyer cannot be forced to purchase a property for more than what the appraisal has deemed it worth.  Since financing is based on the lower of the purchase price or appraised value, you can also discuss with your loan officer restructuring a home loan solution based on the lower appraised value (i.e., lower your down payment, take a higher than market rate for a large credit towards closing costs, etc.).

As you can see, this contingency is a very useful protection for buyers, protecting them from being forced to pay more than what a home is worth.  And its waiver by buyers over the last several years was a huge boon to sellers — who saw their home prices rise unchecked by appraisals, thanks to bidding wars.

Please reach out if you have questions about this contingency and would like further information.

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