Should You Have an Appraisal Contingency in Your Real Estate Offer?

When navigating the complexities of Edmonton real estate transactions, one term you may encounter is appraisal contingency. What is it exactly? Should you include it in your offer, or can you proceed without it? Understanding this clause is essential for making informed decisions when buying a home.

This guide will break down what an appraisal contingency is, how it works, its benefits, risks of waiving it, and possible alternatives. By the end, you’ll have the knowledge you need to determine if this crucial safeguard belongs in your real estate offer.

What is an Appraisal Contingency?

An appraisal contingency is a clause you can include in a real estate purchase agreement. It states that the sale price of the property must align with or be above the appraised value determined by a licensed third-party appraiser. If the appraised value falls short, the buyer has the option to renegotiate, cancel the contract, or proceed under specific conditions.

For example, say you’re buying a home for $500,000, but the appraisal comes in at $450,000. The appraisal contingency protects you from paying $50,000 more than the property’s current market value.

Now that you understand the basics, let's examine how appraisal contingencies work in practice.

How Appraisal Contingency Works

Here’s a step-by-step look at how an appraisal contingency operates:

1. Appraisal Ordered by the Lender

Once the buyer and seller sign the purchase contract, the buyer’s mortgage lender typically orders an appraisal. This appraisal determines the fair market value of the home based on factors such as comparable sales, location, and the property’s condition.

2. Appraisal Meets or Exceeds the Offer

If the appraised value is equal to or higher than the agreed sale price, the deal proceeds as planned. Since the lender is satisfied that the property is worth the loan amount, closing moves forward without any issues.

3. Appraisal Falls Short of the Offer

If the appraisal value is lower than the agreed sale price, things get tricky. With an appraisal contingency in place, buyers have several options:

• • Renegotiate the price with the seller to align with the appraised value.
  • Pay the difference out-of-pocket to make up for the shortfall.
  • Cancel the contract without forfeiting their earnest money.

This flexibility is what makes appraisal contingencies so valuable. Without it, buyers might be obligated to proceed with a purchase that could result in financial strain.

Benefits of Including an Appraisal Contingency

Adding an appraisal contingency to your offer offers significant advantages, especially in uncertain or volatile markets. Here are the key benefits:

Protection Against Overpaying

Including an appraisal contingency ensures you’re not committing to pay more than a property’s fair market value. It’s a safeguard against inflated prices, particularly in hot markets where bidding wars lead to overvaluation.

Renegotiation or Exit Options

If the appraisal value is lower than the sale price, you gain the ability to either renegotiate terms with the seller or cancel the deal entirely without penalty. This gives you crucial leverage during negotiations.

Peace of Mind

Buying a home is a major financial investment, and an appraisal contingency provides assurance that the property is worth the agreed price. Knowing that the deal hinges on a professional valuation can help you feel more confident about moving forward.

Risks of Waiving an Appraisal Contingency

Some buyers, especially in competitive seller’s markets, may consider waiving the appraisal contingency to make their offer more attractive. While this strategy might help you stand out, it does come with significant risks.

Financial Loss

Without an appraisal contingency, you’re on the hook for the entire agreed price—even if the property’s value is significantly lower. This may leave you overpaying or stretching your budget to cover the gap.

Increased Borrowing Costs

If the appraisal value falls short, your lender will only finance up to the appraised amount. You’ll need to come up with the difference out of pocket, which can strain your finances or delay closing.

Limited Negotiation Power

By waiving the contingency, you give up your option to renegotiate the sale price based on the appraisal. This eliminates a critical safeguard that could save you thousands of dollars.

Alternatives if the Appraisal Falls Short

If the appraisal value comes in low but you still want to proceed with the purchase, these alternatives can help:

Negotiate with the Seller

The most common approach is to renegotiate the sale price with the seller. Many sellers are willing to lower the price to match the appraisal, especially if they want to close quickly.

Cover the Difference

If your finances permit, you can pay the difference between the appraised value and the sale price yourself. This ensures the deal moves forward without requiring additional negotiation.

Request a Second Appraisal

Sometimes, an appraiser may undervalue a property due to errors or discrepancies. You can hire a second appraiser to get a different opinion. Keep in mind, this involves additional costs and time.

Walk Away from the Deal

With an appraisal contingency in place, you have the option to cancel the contract and retain your initial deposit. This last-resort option prevents you from overextending your budget on an overpriced home.

When to Consider Waiving the Appraisal Contingency

While appraisal contingencies generally favor buyers, there are specific situations where waiving this clause may be worth considering:

Competitive Seller’s Markets

If you’re in a competitive market where sellers prioritize offers with fewer contingencies, waiving the appraisal clause might make your offer more appealing. Just be sure you’re prepared for the financial implications.

Willing to Pay Over Market Value

Some buyers are emotionally attached to a particular home or neighborhood. If you’re willing and financially able to pay above the appraised value, you might choose to waive the contingency.

Sufficient Financial Resources

Buyers with ample savings or cash reserves may feel comfortable waiving the appraisal contingency. Having the funds to cover any shortfalls minimizes the risk involved.

Make Smart Real Estate Moves

An appraisal contingency can be a powerful tool to protect your financial interests when buying a home. By ensuring the property’s value aligns with the sale price, this clause provides peace of mind, flexibility, and negotiating power. On the flip side, waiving it requires a deep understanding of your finances and the current market climate.

Before making any decisions, assess your risk tolerance, financial situation, and the competitiveness of the market. Consulting a trusted real estate agent or financial adviser can help you weigh the pros and cons effectively.

If you’re serious about making informed Edmonton real estate decisions and minimizing risks, be sure to leverage professional insights throughout the buying process.