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An appraisal contingency clause gives the buyer the right to back out of the home purchase – without forfeiting their deposit – if the property doesn’t appraise for at least the agreed upon purchase price.
For example, if the agreed upon purchase price is $1,000,000 and the appraisal comes back as valuing the property at $900,000, the buyer can exercise the appraisal contingency to void the purchase agreement with no penalty or loss of deposit.
Mortgage loans often have rules regarding the Loan-to-Value (LTV) ratio, and appraisals are then required by those lenders prior to purchase.
What can happen in the case that the appraisal comes in lower than the agreed upon purchase price is:
1. The seller lowers the purchase price to meet the appraisal amount.
2. The buyer contributes additional cash to arrive at an acceptable LTV ratio for the lender.
3. Some negotiated combination of 1 and 2 above – the seller lowers the price somewhat and the buyer contributes cash to reach an acceptable LTV ratio for the lender.
In a competitive environment where multiple buyers are making offers for the same property, one way for a buyer to make their offer more attractive to the seller is to waive the appraisal contingency. This would mean that the buyer would complete the purchase regardless of the value suggested by a licensed appraiser.
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Derek Vaughan