So Your Home Didn’t Appraise, Now What?

by Michael Repka, Esq.

When a buyer submits an offer on a home, they need to decide which, if any, contingencies they will include in the proposed contract. Naturally, the more contingencies, the better for the buyer, but an offer with fewer contingencies is more likely to be accepted by the seller—or accepted at a lower price.

Among others, the buyer will need to decide whether they wish to include a financing contingency and/or an appraisal contingency.

As Silicon Valley’s number one listing agent, I am always skeptical of buyers that are so uncertain about their ability to get financing that they need to include a financing contingency. It seems imprudent for a seller to accept a risk related to the buyer’s ability to qualify for a loan that the buyer is unwilling to accept themselves.

On the other hand, I find appraisal contingencies less objectionable. They are objective in nature and have nothing to do with the particular buyers’ credit worthiness. Naturally, I would advise a seller to accept an offer with no contingencies over one with an appraisal contingency. However, an appraisal contingency is more palatable than a financing contingency.

If there is an appraisal contingency, the buyer has the option to cancel the contract in the event that the home does not appraise for the contract price. This is true even if the buyer would otherwise qualify for financing.

Alternatively, the buyer would be in a position to negotiate a price reduction, although the seller would be under no obligation to acquiesce.

The situation is very different if the buyer does not have an appraisal contingency. In those cases, the buyer may be required to come up with additional funds to make up the difference between the contract price and the appraised value. If the buyer is unable to close, then they could lose their deposit, or, in some cases, even more.

Another alternative for the buyer is to appeal the appraised value. Nowadays, many banks require two appraisals if the home’s value is in excess of a prescribed limit. Many banks also have a procedure in place if the appraised value varies.

Yet another alternative is for the buyer to apply to a different bank, which would rely upon an entirely different appraisal. However, unless initiated early in the process, this may require the seller having to agree to an extension.

Given that DeLeon Realty pays for all costs related to staging for the entire time that our listings are on the market, we have a general company policy to keep homes staged until after the appraisal is completed. This is at no cost to the buyer or seller, and it reduces the likelihood that a home will not appraise for the sale price.

Buyers and sellers need competent legal counsel when preparing or accepting offers. To my knowledge, DeLeon Realty is the only major local brokerage to provide free access to an attorney to discuss clients’ legal rights and responsibilities under a real estate contract.