What you need to know about appraisal contingency when buying a home?
Buying a house can be risky and expensive. Once you have made an offer on a house and it is accepted by the seller, you’re both bound to a legally binding agreement. As the buyer, if you back out for a reason that not allowed in the contract, you will lose your earnest money, which could be thousands of dollars. In order to protect home buyer, there are seven contingencies inside Arizona Residential Resale Purchase Contract. One of the contingency is Appraisal Contingency spelled out in section 2i.
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What is an appraisal contingency?
An appraisal contingency clause gives the buyer the right to walk away from the transaction with your earnest money if the appraised value of the property is lower than the agreed-upon purchase price.
How does appraisal contingency work?
If you are buying a house in Arizona with a loan or mortgage, your lender will be requesting an appraisal. Appraisal is a process that requires a third-party appraiser assesses the current value of your home to ensure the buyers and the lender that they’re not overpaying.For example, if you agree to buy a home for $300,000 but the appraised value comes in at only $280,000, the lender isn’t likely to give you a loan for the property. In this situation, you can then exercise your appraisal contingency clause to back out of the sale and get your earnest money back. You will be out the cost of the appraisal, but that’s only a couple hundred dollars compared with the thousands of dollars you might otherwise lose in earnest money.
What happens when the home does not appraise for the sales price?
Even the home is not appraised for the sales price, buyer still has some other options to proceed and complete the transaction. In Arizona, buyer has 3 options in the event the home doesn’t appraise for the price to pay.Option 1: Depending on how much gap/differences between the appraised and sale price, buyer can pay the difference. With the scenario above, the buyer will pay additional $20,000 to complete the transaction.
Option 2: Buyer and their agent can renegotiate a price reduction with the seller to meet the appraised price or split the difference. If the seller agreed, then the transaction will continue.
Option 3: Buyer can choose to cancel the contract. If the buyer is unwilling or unable to make up the difference between the appraisal price and the sales price, or if the seller is also not willing to renegotiate the price, this may be the buyer’s only option. Buyer can cancel the purchase and get the earnest money back.
What is appraisal contingency timeline?
In Arizona, there is no timeline for appraisal contingency. However, according to purchase contract section 2i: “If the Premises fails to appraise for the purchase price in any appraisal required by lender, Buyer has five (5) days after notice of the appraised value to cancel this Contract and receive a refund of the Earnest Money or the appraisal contingency shall be waived.”In short, if the property is not appraised at purchase price and buyer wants to cancel the purchase, buyer must inform seller within 5 days after receive the appraisal report.
Should buyer waive the appraisal contingency?
In most cases, there’s really no clear benefit for the buyer to waive an appraisal contingency. It’s there to protect buyers’ best interests. However, there are some scenarios where buyer might consider waiving appraisal contingency, such as buyer wants to make your offer more enticing to the seller in a hot market. In that case, you want to make sure you have enough cash to cover the difference or gap in the event the home is appraised lower than the sale price.
The bottom line
The appraisal contingency is one of the most important safeguards available to home buyers. The appraisal contingency protects buyer from overpaying the house. In the event of the home is not appraised, the appraisal contingency gives buyer the option to negotiate a lower sale price or walk away from the deal.
Swee Ng, Realtor and Phoenix East Valley resident specializing in win-win real estate transaction through great communication and fighting for his clients’ best interest. After all, this is more than real estates, this is about your life and your dreams.
If you are looking to buy or sell your home in Chandler AZ and surrounding area, we hope you will consider us. Contact us today for complimentary consultation.
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