Why the Appraisal Contingency Matters?

A few years ago, Schorr Law’s lead trial attorney, Zachary Schorr was quoted in an article entitled “An Appraising Eye”, which was included in a new home buyer’s guide. The article talked about the importance of the appraisal in the home buying process.

We now would like to focus on why the appraisal contingency matters. An appraisal contingency is a condition in a typical real estate contract that allows the potential buyer of the property to back out of the transaction if the property does not appraise at the purchase price.

For example, consider the following scenario:

  • Buyer agrees to buy a property for $1 million
  • Buyer has $200,000 for a down payment
  • Buyer’s lender will only lend buyer 80% of the purchase price, buyer must come up with the remaining amount.

The lender will typically order an appraisal to determine if the property is really worth the amount that the buyer agreed to pay for it. Typically, the appraiser will even get a copy of the purchase and sale agreement.

But, what happens if the property appraises at $900,000? If that were to occur, then the lender would only be willing to lend the buyer $720,000, instead of the $800,000 that the buyer had originally planned on borrowing from the lender. In this scenario, the buyer would have to either come up with the additional $80,000 and now put down $280,000 or back out of the deal. This is why the appraisal contingency is important, it allows the buyer an out if the property does not appraise at or above the agreed upon purchase price.

Of course, if the property does not appraise at or above the purchase price the borrower could try to renegotiate the deal (get the purchase price lowered) if the seller is willing to lower the purchase price to accommodate the low appraisal.

For help with your purchase and sale transaction, please do not hesitate to contact us. At Schorr Law, we frequently advise buyers and sellers (even when they have real estate agents) on the terms of their deal and help them navigate escrow.