Working with Appraisal Contingencies

Working with Appraisal Contingencies

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Appraisal ContingenciesCongratulations!  You made an offer on the Modesto home and it was accepted.  You signed the contract and paid the deposit.  

Now for the bad news: the Modesto house has appraised for less than your offer and now the bank won’t give you a mortgage.  That is why there are appraisal contingencies, just for situations like this.

The Overview

A contingency is a condition that must be met before a real estate contract becomes legally binding. Real estate contracts typically include three conditions: the appraisal contingency says the house must be appraised at the sale price or higher.  The inspection contingency requires the home to pass an inspection. And the finance contingency says that it depends on the bank granting a loan.  

You give a specific amount of time for these conditions to be met and if they aren’t, you get a refund of your deposit, or earnest money.

How does it work?

The bank will hire a professional appraiser to come to the property and determine the fair market value of the home. This number is based on comps in the area and the condition of the property.

The Modesto house needs to appraise for higher than the loan amount you need to buy the house.  If it doesn’t, you will not be granted a mortgage to buy the property.  The seller can lower the price to make the deal still happen but if not, you will not be able to close.

Sometimes the finance contingency covers the risk like the appraisal contingency. If you don’t have the cash to make up the difference between the appraisal and the sale price and there is no appraisal contingency, you are in breach of contract and can lose your deposit.

That’s why appraisal contingencies are so important to be included in the contract whether there is a finance contingency or not.

What can I do if an appraisal is too low?

If the appraisal comes in too low, both parties can walk away from the deal, but they don’t necessarily have to.  You can ask the bank to reassess the value of the Modesto home.  When you ask for a second appraisal you will have to present evidence of why you think the house is worth more.  Give new or updated comps any point of features that the first appraiser might have missed.  

If you think you have a strong case, move forward with the petition.  If the second appraisal comes in higher, you might still be able to secure the loan needed to purchase the property.

Should I skip contingencies?

Sometimes if you are in a hot real estate market adding in contingencies can make a deal go south. When buyers are competing for a Modesto house they want to present the best offer possible.  If they aren’t offering all cash, it might be tempting to skip the contingencies to make sure you get the house you want.  

If you do that, you need to be aware that you are assuming the risk that you might not get the loan you need.  If you have a big down payment and you don’t need a lot of financing, it may work for you.  But if you need a loan to close on the property, you might want to reconsider skipping the contingency.

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