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How a Home Appraisal Contingency Works in California
In a previous article, we talked about the mortgage financing contingencies that home buyers can include within their purchase agreements. Real estate contingencies essentially give home buyers a way to back out of a transaction without losing their earnest money deposits, if certain scenarios arise.
Today, we will talk about the home appraisal contingency and why some California home buyers include them within their real estate contracts. We will also talk about the risks of waiving a home appraisal contingency in order to make your offer more attractive.
What Is a Home Appraisal Contingency?
When buying a home in California, you will have the option to include certain contingencies within your contract or purchase agreement.
In legal terms, a contingency is a future event or scenario that has to happen, in order for the real estate transaction to proceed. There are different types of contingencies within California real estate purchase agreements. The home appraisal contingency is one of the most commonly used of these clauses.
As you might already know, a home appraisal is one person’s determination of market value. A licensed appraiser will review a property to determine how much it is worth in the current real estate market.
Appraisals are almost always required when a mortgage loan is being used. This is true for conventional and government-backed loans alike.
In California, a home appraisal contingency says that if the house appraises for less than the purchase price, the home buyer can back out of the deal. More importantly, this kind of clause allows the buyer to back out without sacrificing their earnest money deposit.
Example: A purchase agreement might state that the “buyer’s obligation to purchase the property is contingent upon the property appraising for not less than the purchase price.” It might go on to specify a certain number of days the buyer has to request the appraisal. If the appraisal comes in below the purchase price, the clause would allow the buyer to “waive this appraisal contingency or terminate this agreement by providing written notice to seller.”
There are variations on the home appraisal contingency within California. But that’s the most common example. It is a clause written into real estate purchase agreement that allows the buyer to terminate the contract (and exit the deal) if the home doesn’t appraise for the purchase price.
Waiving Contingencies in a Hot Real Estate Market
Today, many of California’s real estate markets remain highly competitive due to tight inventory conditions. As a result, home buyers often have to go above and beyond to compete with other offers.
This is why some home buyers in California choose to waive their home appraisal contingency. They do this to make their offers “cleaner” and less complicated for the seller. A cleaner offer is a more appealing one, from a seller’s perspective. And in some hot real estate markets, this kind of strategy might be needed to edge out other buyers.
Over the past couple of years, we witnessed an increase in the number of California home buyers waiving their appraisal contingencies. It has also become more common to waive other types of contingencies as well, such as the home inspection and mortgage financing contingency.
But there are certain risks associated with the strategy.
The primary risk is something we’ve already covered. If a home buyer backs out of a real estate transaction after signing a purchase agreement, and does not have the necessary contingency in place, they could end up losing their earnest money deposit. These deposits commonly range between 1% and 3% of the purchase price. So they can easily add up to thousands of dollars — especially in pricey real estate markets.
Understanding the Potential Risk vs. Reward
For some home buyers in California, waiving real estate contingencies becomes more of a necessity. This is often true in highly competitive real estate markets where sellers receive multiple offers from buyers. In this kind of market, it might even be necessary to waive certain contingencies, such as the home appraisal contingency.
For other buyers, the potential downside of losing deposit money justifies the use of certain contingencies. Home buyers with limited funds in the bank typically don’t feel comfortable jeopardizing their earnest money deposit, and rightfully so.
If you are considering waiving a home appraisal contingency in California, just make sure you understand the risks associated with such a move. It’s also wise to work with a knowledgeable real estate agent who understands local market conditions. An experienced agent can tell you how sellers might perceive your offer, based on the types of contingencies you are including.
Disclaimer: This article provides a basic overview of home appraisal contingencies in California. It’s not meant to take the place of professional legal or real estate advice. We encourage home buyers to research this topic thoroughly in order to make an informed decision when buying a house.
