Appraisal Contingencies, Clauses, and Riders

Appraisals appear in real estate purchase contracts as an appraisal contingency, or an appraisal clause. The appraisal contingency or clause is a provision in the contract that outlines the conditions that must be met regarding the appraisal of the property, before the sale can be completed. 

The terms and conditions of the appraisal contingency, such as the agreed-upon value of the property, the time frame for the appraisal to be completed, and the process for resolving any discrepancies between the appraised value and the agreed-upon purchase price, are usually outlined in an appraisal rider.

Appraisal Contingency Period

The appraisal contingency period is the time frame during which the buyer is allowed to have the property appraised and to review the results of the appraisal. This period is specified in the real estate purchase contract and is a few days to a couple of weeks. During this time, the buyer can decide to proceed with the purchase of the property as long as the appraisal meets the agreed-upon value or terminate the contract if it does not. 

After the contingency period expires, if the buyer wants to move forward with the purchase, they would have to waive the appraisal contingency. This can be a risky move, as the buyer is no longer protected by the appraisal contingency, and they may be overpaying for the property. If the buyer has not waived the contingency or the contingency has not been met, the buyer has the option to terminate the contract and walk away from the sale. This means that the sale will not proceed and the buyer will not be obligated to purchase the property.

Removing Appraisal Contingencies 

Removal of the appraisal contingency means that the buyer agrees to proceed with the purchase of the property regardless of the outcome of the appraisal. Removing appraisal contingencies can have both pros and cons for the buyer and the seller.

Pros for the buyer include:

• Faster closing process, as the appraisal contingency does not need to be met before closing.
• More flexibility in negotiating the purchase price.
• Increased likelihood of the sale going through, as the buyer is not relying on the property being appraised for a certain value.

Cons for the buyer include:

• Increased risk of overpaying for the property, as the buyer may not have the protection of the appraisal contingency to ensure the property is worth the purchase price.
• Difficulty in getting financing for the purchase, as lenders may require an appraisal contingency to be in place before approving a loan.

Pros for the seller include:

• Increased likelihood of the sale going through, as the seller does not have to worry about the property not appraising for the purchase price.
• Faster closing process, as the appraisal contingency does not need to be met before closing.

Cons for the seller include:

• Less negotiating power on the purchase price, as the buyer may not be as willing to pay a higher price without the protection of the appraisal contingency.
• Risk of selling the property for less than it’s worth, as the buyer may not be as motivated to pay a fair price without the protection of the appraisal contingency.

What if the Appraisal is “too low”?

Buyers and sellers hope the property is valued at the appraisal floor or above. The appraisal floor is a minimum value that the property must appraise for in order for the sale to proceed. It is typically set at or slightly above the agreed-upon purchase price, and it serves as a protection for the buyer to ensure that they are not overpaying for the property. It is often included as part of the appraisal contingency in a real estate purchase contract, so if there’s no appraisal contingency, there’s no appraisal floor.

If there is a “low” appraisal and there is an appraisal contingency 

• The buyer may try to renegotiate the purchase price with the seller.
• The buyer may choose to terminate the contract and walk away from the sale.
• The parties may also agree to seek a second appraisal.
• The buyer may decide to waive the appraisal contingency, meaning that they are going to proceed with the purchase regardless of the appraised value.

If there is a “low” appraisal and no appraisal contingency 

• The buyer may still have the option to renegotiate the purchase price, but the seller is under no obligation to agree to a lower price. 
• The buyer may come up with the difference between the purchase price and the appraised value.
• The buyer may walk away from the sale.

A low appraisal addendum provides a way to handle the discrepancy between the appraised value and the agreed-upon price in a structured manner. It is a document that is added to the purchase contract when the property is appraised lower than the agreed-upon purchase price. It outlines the options available to the parties, such as renegotiating the purchase price, seeking a second appraisal or canceling the contract. 

The appraisal contingency and the low appraisal addendum are not always a requirement in the contract and it varies from place to place and from contract to contract. It’s always best to consult with a real estate agent or attorney for your specific case.