In today’s market, homebuyers are doing all that they can to get a leg up on their competition. A shortage of homes for sale means that multiple offers are being made, properties are selling fast, and sale prices are well above asking. It is tempting to make a big offer to win a bidding war, but it could backfire. You could find yourself in a serious situation if your offer ends up being higher than the appraisal value. This is why many deals include an appraisal contingency.
A contingent offer allows you to back out of your purchase agreement if you learn something about the home that makes you want to cancel the sale. When a buyer makes a purchase offer, the contract includes more than just the price and property details. It will also contain stipulations that must be met for the sale to go through. Most purchase agreements include three contingencies that protect the buyer:
- Appraisal Contingency
- Finance Contingency
- Inspection Contingency
The appraisal contingency gives you, the buyer, the opportunity to back out of a pending sale if the property’s appraised market value is less than the agreed-upon price. To pay above the appraised value for a home is often viewed as a risky investment as lenders use the appraisal to determine what they are willing to finance for a home purchase.
If the appraisal comes back lower than your offer, you would either need to negotiate with the sellers to reduce the price or come up with the money to cover the difference between the appraisal and your original offer. If the difference is relatively small, it might be worth negotiating the price down to keep the deal from falling through, but if all else fails, the appraisal contingency gives you an easy out when the appraised value is too low.
As the market stands today, more buyers than homes are available for sale, giving the seller the upper hand. You as the buyer need to craft your offer carefully to compete with others for a home. By waiving the appraisal contingency, you may appeal to the seller by eliminating the chance the deal would fall through if the property does not appraise.
If you are making an offer on a home, make sure you understand the pros and cons and whether or not waiving an appraisal contingency is right for you. You will need to be confident that the amount you are offering is an accurate valuation of the property and that you have extra cash to make up the difference. Also, consider that when it comes to making an offer more enticing there are many ways to do so. Therefore, consider all of your options and what makes the most sense for you in your situation.