It's common for purchase agreements to have contingencies letting buyers or sellers back out of the deal if certain conditions arise or promises go unfulfilled. In an effort to make their offers more attractive than the competition, some buyers drop contingencies, and one that's often sacrificed has to do with the home appraisal. Here's more information about this contingency and why you probably should keep in the contract.
An Appraisal Contingency Prevents You from Overpaying
When you submit an offer to purchase a home, your lender will have the house appraised to confirm its market value. The problem is the bank will only finance the home up to the amount of its appraised value. If the home is valued at $300,000, that's generally the maximum amount of money you can get for the property. This is because the bank is risk averse and wants to ensure it can recoup its money if it has to sell the home due to debtor default.
This is important to understand because, if the home appraises for less than the amount you offered for the home, you'll have to pay the difference in cash. You offered $325,000 but the home appraises for $300,000, for example, you're responsible for paying the extra $25,000 out of your pocket.
This is where an appraisal contingency can be immensely helpful. You can require the home appraisal to come within a certain percentage of the sale price (or at the sale price) and have the option to renegotiated or withdraw your offer if it doesn't, which will help you avoid paying more than the home is worth.
Without an appraisal agreement, you'll be stuck paying your original offer price. You can try to negotiate with the seller, but the homeowners won't have much motivation to work with you since you're already locked in to the purchase via the contract.
Dropping the Contingency Makes Sense Occasionally
As you can see, it generally isn't a good idea to get rid of the appraisal contingency. The only time it would make sense is if you're fairly certain the home will appraise at or above your offer price. If you're buying in an area where home prices have remained steady, the appraisal will likely come close to your offer, so you probably could drop it without any ill effects.
Be aware, though, the value of a home is based on a number of things. While home values in the neighborhood may be high, a home could be appraised for less if there is structural damage or other issues with the house, for example.
For help in deciding whether to keep or discard an appraisal contingency or assistance with finding the right homes for sale, contact a real estate agent.
