Using Appraisal Contingencies When Buying in the Bay Area

When buying a home in the Bay Area, you could write an appraisal contingency into your purchase offer. Or not. Some buyers choose to waive this contingency, to make their offers more attractive to sellers. That’s a common strategy in a competitive real estate market like the Bay Area.

But what is a home appraisal contingency, and when does it make sense to use one? In this article, we’ll explain how these contingencies works, and the difference between a contingent and non-contingent offer.

The Appraisal Contingency Explained

In its simplest form, a home appraisal contingency is a condition that must be met before a real estate transaction can be completed. These contingencies give home buyers a way to protect themselves when making an offer on a house. In some cases, appraisal contingencies can prevent buyers from losing their deposits.

This is what’s referred to as a “contingent offer.” The purchase offer is contingent, or dependent, upon certain conditions being met. If those conditions are not met, the buyer can back out of the deal and keep their earnest money intact. (As long as it’s written that way in the contract.)

A non-contingent purchase offer, on the other hand, is one that does not include any contingencies. This is sometimes referred to a “clean” offer.

When it comes to buying a home in the Bay Area, the home appraisal is one of several contingencies that can be attached to the purchase agreement. An offer could also be contingent upon the following:

• A satisfactory home inspection
• The sale of the buyer’s current home
• Mortgage financing approval
• A clean and clear title transfer

A contingency is not a contract. Instead, they are usually included as additional clauses within a standard purchase offer contract. And, as with the offer itself, the seller has the right to accept or reject the individual contingencies that are included.

How It Relates to the Earnest Money Deposit

In the Bay Area, appraisal contingencies give home buyers certain legal protection. One of the most important protections has to do with the earnest money deposit.

When making an offer on a house, home buyers often include an earnest money deposit. If all goes smoothly and the deal eventually closes, the earnest money is then applied to the home buyer’s down payment. But if the buyer backs out of the deal, they could risk losing their earnest money.

And that’s where contingencies come into the picture. If the buyer backs out in accordance with a contingency that’s included within the purchase contract, he or she will likely keep the deposit. But if they back out without the added protection offered by purchase contingencies, they risk losing their earnest money.

Navigating the Bay Area Real Estate Market

You’re not required to use an appraisal contingency when buying a home in the Bay Area. If you’re going to use a mortgage loan to help finance your purchase, your lender will likely require an appraisal. But the contingency part is optional.

There might even be scenarios when it makes sense not to include one.

The San Francisco Bay Area is a highly competitive real estate market. Tight inventory conditions often force buyers to compete fiercely with one another. This was true for all of 2021, and it looks like 2022 will bring more of the same.

Some home buyers choose to make a clean or non-contingent offer, hoping the seller will be more inclined to accept their offer. But, as we explained above, there are risk associated with this kind of strategy. The biggest risk is that you could potentially lose your earnest money, if you back out because of a low appraisal.

But every real estate transaction is different, and every home buyer is different. Some buyers are comfortable accepting this kind of risk and might feel it’s the only way to buy a house. Others might not be able to afford the potential loss of their earnest money, and use contingencies to prevent such a scenario.

Here are some general guidelines to bear in mind:

• In a seller’s market, buyers have to work harder to get their offers accepted. As a result, contract contingencies are less common.
• In a buyer’s market, sellers are generally more flexible when it comes to accepting offers. So buyers are more likely to include appraisal and other types of contingencies.

Making a contingent versus a non-contingent offer requires careful consideration. We encourage Bay Area home buyers to research local market conditions in the area where they plan to buy. This can help you make a smart offer when the right property comes along. It’s also wise to seek advice from an experienced real estate agent.

Disclaimer: This article is intended for a general audience and does not constitute legal advice. Every real estate transaction is different, so portions of this article might not apply to your situation. We recommend that you seek advice from a knowledgeable real estate agent when buying a home.