Can A Home Appraisal Ruin A Contract?
Selling a property isn’t always a walk in the park. While signing the closing contract often means that the purchase is a done deal, it’s common for home buyers or sellers to back out near the end of the real estate transaction.
Many variables go into the closing process, and home appraisal is one of the main ones that can cause a contract to fall through. If you’re looking for the best way to sell your house fast and without any unforeseen disruptions, contact us, and you won’t have to deal with any appraisal hassle ever again.
This article goes into the details of how an appraisal can go wrong and affect your contact. But first, let’s define appraise and home appraisal and familiarize ourselves with the commonest contingency definitions in real estate transactions.
What is Appraise, Appraisal, and Appraisal Contingency?
In real estate, the verb appraise means to assess the quality or value of a property, whereas appraisal refers to the actual assessment of property value. On the other hand, an appraisal contingency is a specific clause usually included in the purchase contract to allow either the home buyer or seller to back out from the closing process if the home appraisal is unfavorable to either party.
Before we go any further, let’s first debunk some of the most common confusions around home appraisals and appraisal contingency.
Many first-time home sellers and buyers often confuse home appraisal and home inspection, while others mistakenly think that appraisal contingency is the same as mortgage contingency.
Well, a home appraisal generally refers to a specialist’s opinion on the quality or value of the property in question. It’s mainly done by registered and professionally trained home appraisers who use their extensive knowledge and experience in determining if the property’s value matches its selling price.
Home inspection refers to an official process for identifying current and potential issues within a property. Home inspectors usually any plumbing, building, and electrical problems during a home inspection survey.
Unlike in appraisal contingency, where a contract can fall through after the home appraisal comes out wrong, mortgage contingency only allows buyers to back out of the contract when they can’t secure adequate financing for the property.
Now that we’re all on the same page, you must be wondering how an appraisal contingency works.
How Does an Appraisal Contingency Work?
An appraisal contingency is usually put in a home buying offer to let the seller know that the homebuyer would like to appraise the property as part of the home selling process. With this provision in the purchase contract, the homebuyer automatically gets the flexibility of backing out of the contract once the home appraisal doesn’t match their initial buying offer.
This option helps the buyer protect them from facing any legal penalties and losing their good faith deposit.
An appraisal usually mandates that the homebuyer hires a licensed home appraiser to professionally appraise the property and examine it in light of other recent but comparable property sales within the same area. Once this appraisal process is done, the home appraiser typically issues the homebuyer with an appraisal report for the property.
Typically, such findings always allocate an objective value to the home being sold, which significantly informs homebuyers’ lending decisions. The main problem arises when the home appraisal comes lower than the seller expected or significantly higher than the agreed offer.
These are some of the scenarios that commonly make contracts fall through, but you are the seller who loses more in terms of money, energy, and wasted opportunities.
Some instances where appraisal contingencies can be waived include when dealing with cash buyers. Such appraisal contingency waivers usually make a purchase offer stronger and signifies that the buyer doesn’t intend to appraise your property for a particular value before closing the deal.
What Does Home Appraisal Mean For Buyers and Sellers?
A home appraisal primarily determines and informs them of the amount that a lender can comfortably loan to them for homebuyers. Lenders commonly tend to give out loans based on loan-to-value ratio, which means that an appraisal is inevitable in this case. This means for homebuyers that the lender will loan them less money if the home appraisal is less than the sale price with the hope that the buyer can afford the difference in cash.
Homes that usually appraise higher than the buying price often signifies instant equity, and its impact on the seller will generally depend on how motivated they are. In a practical sense, this scenario means that the property is worth more than the set purchase price. That should be enough reason to make any home seller reconsider closing.
Do Appraisal Contingencies Affect Home Sale Contracts?
In an average home sale, interested homebuyers usually make a purchase offer for the property. The seller accepts the best offer and both parties sign a contract to close the sale. It’s at this point that the property status automatically changes to “under or in a contract” from “for sale” to let other buyers and realtors that the seller is in the process of closing a deal for the property.
However, no home selling or buying process is complete until the seller and the buyer have signed all legal requisites for property ownership transfer at closing. To make things more complicated, many buyers usually include contingency clauses in their contracts. Including such provisions legally mandates that the seller and buyer agree to the terms and conditions stated in the contract but allows them to back out legally with minimal to no consequences.
In our case, most home sale contracts often fall through whenever a home appraisal contingency is not fully met, and the buyer or seller has a change of heart.
Most lenders always require a home appraisal, especially when the buyer is applying for a loan to finance the purchase. An appraisal here lets them know that they won’t be giving out a bigger loan than what the property is worth. This way, they are sure of recouping their investment in case a foreclosure is necessary.
Besides not meeting any of the contact contingencies, below are some warning signs to justify that either party (mostly the homebuyer) is getting cold feet to see the deal through:
- Avoiding contact and isn’t returning calls
- Failure to return contract papers that are signed and dated
- Missing scheduled appointments
- Failure to third party payments like for home inspection
- Needs massive contract changes
What Can I Do To Save My Deal?
If you’re selling through a realtor, the first step in saving the deal is by engaging the involved real estate agents for speedy communications. Do this to ensure that all parties receive all written communications before personally reaching out to discuss emerging concerns.
It’s common for sellers to hesitate to reduce their home sale price or pay for upgrades, but this could generally be worthwhile if losing the deal will be more costly than paying for some minor repairs. In addition, consider reviewing your contract for any “unfriendly” clauses like the one allowing you to legally sue either party for breach of the contract.
Otherwise, consider using an escape clause to protect yourself from appraisal contingency-led fallouts. Including this provision in your sales contract will allow you to review other offers while waiting for the homebuyer’s contingencies to be satisfied.
The Bottom Line
Many different factors can make your home sale fall through, especially failure to meet various contingencies included in the contract thoroughly. The article details some of the primary considerations for sellers to keep in mind when dealing with contract-threatening appraisal contingencies. Well, Woodruff Real Estate & Property Management firm is offering you with a fully-dedicated team that’s well-versed on such matters and ready to save you all the nasty hassles and ensure that you make the most out of your property. Drop us a call at (239) 920 8799 or email firstname.lastname@example.org to get started with a free quote.
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