For most people, signing a contract to purchase a home in Texas is the single most significant thing they’ll do in their lifetime. Real estate contracts have various contingencies that can be added to protect the seller and the buyer. A home appraisal contingency is one of the most commonly used contingencies in real estate. In this article, we’re discussing what a home appraisal contingency is and how it can affect both sellers and buyers. 

What Is a Home Appraisal?

A home appraisal is a professional opinion on the value of a property. A qualified appraiser must conduct home appraisals. Home appraisers use training, education, and experience, to accurately determine a home’s value. 

If you’re purchasing a home in cash, you may decide to forgo a home appraisal. However, if you’re financing your home’s purchase, your lender will likely require an appraisal. This helps to ensure that the lender’s financial risk is limited and that they’re not loaning more than the home’s value. If you’re purchasing a home in San Antonio with cash, you may decide to forgo a home appraisal. 

What Is a Home Appraisal Contingency?

A contingency is a condition that must be met for a real estate in Houston contract to move forward. In the case of an appraisal contingency, the home must appraise for the agreed sale amount. If it fails to meet the stipulated amount, the buyer can walk away from the deal with their earnest money. 

As a buyer, your real estate agent is likely to recommend an appraisal contingency if there’s a chance you may be overpaying for your new home. This is more common in “seller’s markets,” when there’s stiff competition between buyers, 

How Does the Home Appraisal Process Work?

The buyer’s lender orders an appraisal during the loan application. On the day of the appraisal, the appraiser will take a look at the house and carefully inspect its condition and any finishing touches and updates it has. Using similar property sales in the area, the appraiser then creates an appraisal report. The report describes the subject property in detail, recent sales in the area, and determines how much they believe the home is worth. Many factors can impact an appraisal, such as a few recent sales or foreclosures in the area.

What Happens If the Appraisal Comes In Less Than the Agreed Sales Price?

If the appraisal comes back lower than the agreed sales price, negotiations will likely begin. If you’re the buyer, you’ll probably have to ask the seller to reduce the sale price. Having an appraisal contingency in your sales agreement typically gives your more leverage in your negotiations. If the seller refuses to lower the sales price, you’ll have the option to walk away from the deal with your escrow or find the extra cash to make the agreed sales price. 

What Happens If the Appraisal Comes In Higher Than the Agreed Sales Price?

For buyers, a higher appraised value than the agreed sales price is great news. This means that you have instant equity in your new home! Although the sellers may not be happy, it’s unlikely that they’ll find out either way — as the buyer is not obligated to tell the seller the appraised value of the home. 

Should You Add An Appraisal Contingency Into Your Sales Contract?

The decision to add an appraisal contingency is entirely personal and depends on several factors. For instance, if the agreed sales price went above the list price due to a multiple offer situation, it may be prudent to add a contingency. On the other hand, if you’re confident that the sales price is accurate and close to the home’s value, an appraisal contingency may be unnecessary. Your real estate agent will be able to advise your accordingly.