What Is An Appraisal Contingency And Should I Remove It?

What Is An Appraisal Contingency And Should I Remove It?
As a buyer, especially if you have been looking to purchase in California or any other highly competitive market for buyers, have probably heard about the necessity of removing the appraisal contingency in the home purchase contract as you are submitting offers for homes that you are wanting to purchase. I am finding that a good portion of consumers that have submitted several offers already STILL do not know what that means. Also at the same time have also found it difficult to get their offers accepted.
Before you start digging into this post, this is just going to be very cut and dry, it won't go into any long drawn out legal terminology. This is just basic information going over some frequently asked questions in regards to the appraisal contingency.
What is an Appraisal Contingency?
The Appraisal Contingency in the residential purchase agreement is a contingency stating that you as the buyer are agreeing to pay no more for a this home than what it appraises for. The appraisal contingency is typically put into place because a good majority of the population borrows money in order to purchase a home. Because banks and financial institutions will not loan more money for a home then what it appraises for, that is why the appraisal contingency is in place.
What does it mean if I remove the Appraisal Contingency?
To put it simply, you are agreeing to pay more for this house than what it is worth in the event the appraisal comes in low. As stated above banks and financial institutions will not loan more money for a home then what it appraises for, removing the appraisal contingency is just saying if the appraisal comes in low, doesn't matter, I will come in with the cash to cover the difference and pay the price we agreed upon not the appraised price.
Example:
Your offer gets accepted at $350,000 and you remove the appraisal contingency.
The appraisal comes in at $330,000, the banks and financial institutions will only fund the loan up to $330,000.
Removing the appraisal contingency means you are going to come in with an additional $20,000 to cover the spread between $330,000 and $350,000 in order to reach the price that you and the seller agreed on.
Should I remove the Appraisal Contingency?
The real question is, how competitive is my market and can I get the house the I want without removing the appraisal contingency? If you are going into a multiple offer situation and the seller is requiring that the appraisal contingency be removed. Remove it. It boils down to if you want the house or not in that instance. Just keep in mind that just because you remove the appraisal contingency does not mean the appraisal will come in low. There are a lot of instances in todays market where the appraisal contingency was removed and the appraisal came in right at asking price, so the buyer, though removing the appraisal contingency, did not have to come in with extra funds to cover the spread.
Removing an appraisal contingency can seem like a scary thing because you don't know if the appraisal is going to come in too low and the thought of paying thousands of dollars more for a home then what it's worth just sounds flat out silly. In a competitive market, though, removing the appraisal contingency is pretty mandatory if you want your offer to be considered or even accepted.
Here is a helpful tip: Have your REALTOR run the comps (research what model match to comparable homes have been selling for in the area) and research how quickly home values have been rising in the past few months. Based on the comps, knowledge of how quickly home prices are going up and the help of your REALTOR you will be able to determine how much this home is worth to you and how much you are willing to pay in the event the appraisal comes in low.
Are there any homes I can purchase in todays market that does NOT require me to remove the Appraisal Contingency?
Distressed homes such as Foreclosures (REOs and Bank Owned Homes) and short sales are not requiring you to remove appraisal contingencies. With the real estate market picking up, however, the number of available distressed homes for sale has gone down drastically.
There are still some standard sales that are not requiring the removal of the appraisal contingency as well. It's just a matter of doing the research for that area, what homes are selling for, how competitive it is, are there multiple offers on the home, etc.
Just know that in todays market, especially in a competitive market such as California, very seldomly are "low-ball" offers being considered. Sellers are getting what they want for their homes, plus some. It doesn't matter if you are offering "ALL CASH", keep in mind a check from a bank or financial institution is going spend the same way, why would the seller take less?

Stacey Smith
Keller Williams Realty
949-350-8922
DRE. License #01845411