When competition among buyers is fierce, you may be tempted to waive the appraisal contingency to make your offer on a house easier for the seller to accept. While this strategy can work, there are potentially costly drawbacks to waiving the appraisal contingency.
Here’s what you need to know about the appraisal contingency, and the pros and cons of waiving it.
What Is an Appraisal Contingency?
A contingency in real estate is a condition written into the purchase and sale agreement that must be met for the sale of a home to close. When a contingency is not met, it gives one of the parties in the sale the option to cancel the deal.
An appraisal contingency sets a minimum value the home must appraise for. This is to ensure that the buyer is paying a fair price for the property, and to reassure the lender that it isn’t lending more than the home is worth.
How Does the Appraisal Contingency Work?
Mortgage lenders usually require a home appraisal before approving a loan in order to have a professional third-party opinion on the value of the home. Lenders won’t approve a loan for more money than a home is appraised for, because if they need to foreclose on the home and sell it, they will lose money. So, if an appraisal comes in low, that could leave the buyer with insufficient financing to purchase the home.
An appraisal contingency allows the buyer to back out of the deal and take back any earnest money in that scenario. Having an appraisal contingency could give the buyer leverage to get the seller to agree to a lower purchase price to avoid canceling the deal.
Without this contingency, the buyer would still be obligated by the purchase and sale agreement to purchase the home, even with a low appraisal. That means the buyer would need to come up with a larger down payment to cover the difference between the appraised amount and the sale price, because failing to close the deal would leave them liable for breach of contract.
Why You Might Waive the Appraisal Contingency
Waiving the appraisal contingency is common in hot real estate markets. The National Association of Realtors reports that 22% of buyers waived appraisal contingencies in their real estate purchase offers — a number that has been steady in the past couple of years.
As a buyer, waiving any contingency sweetens your offer. The fewer conditions that allow the deal to be canceled, the more confidence the seller can have that the deal will be completed.
One reason that waiving appraisal contingencies in hot markets is popular is that they are of limited benefit when prices are rising. If buyers are confident that a home will appraise for at least as much as they’re offering, they may decide that the contingency isn’t necessary.
Waiving the appraisal contingency is easiest if you’re paying cash for a home because you’re not relying on a lender approving a loan. Those using conventional loans may be able to waive the contingency if they have enough cash to make up the potential difference between the sales price and the appraised value.
Another reason to consider waiving the appraisal contingency is that a financing contingency will protect you if you’re unable to get a mortgage. If your lender denies your mortgage application, which may happen if the home appraises too low, that can give you the chance to back out of the deal.
Risks of Waiving the Appraisal Contingency
Waiving appraisal contingencies can be risky if you aren’t confident that the home is worth what you’re offering for it.
Typically, as a homebuyer, you provide some earnest money with your offer. Once the seller accepts your offer, you might provide additional earnest money. Typical earnest money deposits can range from 1% to 3% of the home’s value.
For example, if you bought a home for the median price in the United States — $467,700 as of the fourth quarter of 2022 — you’d offer between $4,677 and $14,031 in earnest money.
If the appraisal comes back low — say at $400,000 — an appraisal contingency would give you the option to renegotiate the price or to walk away and keep your $14,000 in earnest money.
With no appraisal contingency, you’d still have to buy the home. That means you’d need $67,700 more for a down payment to secure your mortgage, or you’d need to find another way to pay for it. If you back out without the contingency, you’ll lose the home and the $14,000 in earnest money.
“Unless a buyer is paying all cash or making a very sizable down payment, having an appraisal contingency is strongly advised,” says Ken Sisson, a Los Angeles-based real estate agent.
What Can You Do If an Appraisal Comes In Lower Than Expected?
If the appraisal comes in below expectations, there are a few things you can do.
First, you have the option to walk away from the deal. If you waived your appraisal contingency, that means giving up your earnest money, but it may be preferable to forfeit that cash than to overpay for a home.
Another option, especially if the appraisal is only slightly low, is to ask for a second opinion. You can hire another appraiser to examine the home and see if they give a different answer. However, unless you can show a clear mistake that could have affected the first appraisal — such as incorrect square footage or number of bedrooms in the report — many lenders won’t agree to a second appraisal.
You also can ask the seller to renegotiate the price of the home. This is easier to do if you have an appraisal contingency.
Finally, you can increase your down payment and reduce the amount you have to borrow to buy the home.
Pros and Cons of Waiving the Appraisal Contingency
There are some benefits to waiving the appraisal contingency, but it’s also important to consider the drawbacks before you decide to do so.
- Your offer is more attractive. “In a competitive housing market, where multiple offers are being made on a property, a seller may prefer an offer that waives some or all contingencies,” says Matthew Martinez, CEO of Diamond Real Estate Group in Santa Rosa, California.
- Save money if you’re paying cash. If you are buying with cash and don’t need an appraisal for a lender, waiving the appraisal saves you money.
- No guarantees that the appraisal contingency helps with negotiating. If you keep the appraisal contingency in place in the hopes that it will help you negotiate a better price, there’s no guarantee that it will do so. Removing the appraisal contingency might do more to strengthen your position. “If an appraisal comes back low, can you try to renegotiate? Yes,” Sisson says. “Will the seller renegotiate with the buyer? Maybe. There is no specific right to do so, however, nor is there any built-in expectation.”
- Pay more than the home is worth. “The risk of waiving the appraisal contingency in a real estate contract is that the buyer may end up paying more for the property than it is worth,” Martinez says. You’d start out owning the property with negative home equity, meaning you’d have to pay private mortgage insurance. It also would be years before you’d have enough equity to borrow against if you need a home equity loan, home equity line of credit, or cash-out refinance.
- Lose your earnest money if you back out. Without the appraisal contingency, you forfeit any earnest money you’ve provided if you choose to back out of the deal.
Appraisal Contingency FAQ
Here are answers to some frequently asked questions about waiving the appraisal contingency.
No, the seller can’t back out if the home appraises above your offer. However, the seller may use other contingencies as a reason to back out. For example, if the home needs repairs and you want the seller to cover them, the seller could refuse and back out of the deal.
Generally, appraisal contingencies protect buyers rather than sellers. That’s why, according to Martinez, waiving the contingency can make your offer stronger.
Waiving appraisal contingencies can be risky, but it isn’t uncommon in hot markets. In February 2023, roughly 28% of buyers waived the appraisal contingency.
The Bottom Line on Waiving Appraisal Contingencies
Appraisal contingencies protect buyers from paying more than a home is worth. They’re very common, but some people choose to waive them in strong real estate markets to sweeten their offers. If you feel that waiving the appraisal contingency is the right move for you, consider the drawbacks and make sure you have a plan for dealing with them.