Real estate contingencies make the sale conditional. In other words, the buyer will only buy the home if certain conditions are met. The appraisal contingency in Florida is a common contingency that impacts whether or not a sale goes through.
Below, we’ll explore the appraisal contingency in-depth, including when to use it, when not to, and what happens after the appraisal.
What is an Appraisal Contingency in Florida?
An appraisal contingency in Florida makes the sales contract conditional on the home’s appraisal value. Typically, the property has to appraise for at least the purchase price for the contract to hold up as-is. If the home appraises for less than the purchase price, the buyer can back out of the sale or renegotiate without fear of losing any earnest money.
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How Does an Appraisal Contingency Help the Buyer?
Think of the appraisal contingency as a safety net for the buyer.
A seller lists the home for what they think it’s worth, often based on their realtor’s expertise. Buyers make an offer based on what they think the home is worth, but their offer is also influenced by other factors, such as the competitiveness of the market.
With an appraisal contingency, the buyer can hire an appraiser to appraise the home to ensure the property is worth what they think it is. If the home isn’t worth as much as the purchase price (or the amount written into the appraisal contingency rider), the buyer has the chance to back out of the sale.
When to Use an Appraisal Contingency
You should almost always use an appraisal contingency when you’re financing the home purchase with a mortgage.
Most mortgage lenders require an appraisal, and if the home appraises for less than the purchase price, the mortgage company may not loan you the money. Why? Because the lender doesn’t want to lose money if you default on your mortgage.
An appraisal contingency gives you a way out of the sale if the home is under-appraised and you can no longer secure a mortgage.
When to Leave Out the Appraisal Contingency
Leaving out an appraisal contingency can make your offer more attractive to the seller. According to the National Association of Realtors, an estimated 19% of homebuyers waived the appraisal contingency in March 2023. Despite the large number of homebuyers who go this route, it’s not a decision you should make lightly.
First, it’s important to understand that by waiving the appraisal contingency, you’re not waiving an appraisal. Instead, you’re waiving the ability to back out of the sale based on the results of the appraisal.
With that in mind, instances where leaving out the appraisal contingency may make sense include:
- You Have Plenty of Cash On Hand: If you can afford to make up the difference between the appraised value and the purchase price (called the appraisal gap), then waiving the appraisal isn’t as risky. You can still borrow money from your lender with a larger down payment to make up the difference.
- You Qualify for an Appraisal Waiver: Fannie Mae’s Value Acceptance program and Freddie Mac’s Automated Collateral Evaluation (ACE) program uses historical data and public records in place of traditional third-party appraisals. Other lenders might offer similar programs. However, eligibility is often limited based on strict qualifications, such as having an excellent credit score or a lot of equity in your current home.
How Do You Submit the Appraisal Contingency?
In Florida, the Comprehensive Rider to the Residential Contract For Sale And Purchase is used.
The rider outlines a few key details:
- The buyer pays for the appraisal from a licensed Florida appraiser
- Date by which the appraisal must be completed
- The amount the home needs to appraise for
- The buyer must provide the seller with a copy of the appraisal if the home under-appraises
What Happens After the Appraisal?
The results of the appraisal report will determine what happens next.
If the appraisal comes in low…
Suppose you’re purchasing a home for $350,000, but the appraisal report shows that its appraised value is only $333,000.
First, you need to provide the seller with a copy of the appraisal report. Then, you’re left with three options:
- Terminate the contract: You can back out of the contract without losing your earnest money.
- Renegotiate: Work with your realtor to renegotiate the purchase price. The seller might accept a lower offer or offer other concessions that make purchasing the home worthwhile.
- Proceed as-is: If you’re unable to make progress with negotiations and don’t want to terminate, you can proceed with the sale as-is. You may, however, need to use cash to cover the appraisal gap.
If the appraisal comes in high…
Suppose that same $350,000 home actually appraises for $367,000. You don’t need to take any further action. Instead, you can continue with the deal as-is. You’re not required to disclose the actual appraised value to the seller, and it doesn’t help you to disclose the information to the seller.
Final Thoughts on Appraisal Contingencies
An appraisal contingency protects your interests as a buyer. It gives you the ability to back out of a sale if the home appraises for less than you expect. While it may be tempting to give up that safety net, it’s not the only way to make your offer stand out in a competitive market.
For example, you might:
- Offer to pay some or all of the seller’s closing costs or transfer tax
- Be flexible with the closing date to accommodate the seller’s timeline
- Be open to a post-occupancy agreement
- Make your inspection period as short as possible
Other Common Home Sale Contingencies You Should Know About
An appraisal contingency isn’t the only contingency you’ll encounter or consider if you’re selling or buying a home. The eight most common home sale contingencies include:
- Financing contingency
- Appraisal contingency
- Title contingency
- Inspection contingency
- Sale of Buyer Property contingency
- Kick-Out contingency
- Homeowners Association (HOA) contingency
- Homeowners Insurance contingency