How a Home Appraisal Contingency Works in Washington

November 8, 2022
Last updated:
November 8, 2022
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In a previous blog post, we explained the concept of real estate contingencies and how they apply to home buyers in Washington State. Today, we will zero in on the home appraisal contingency in particular. You’ll learn what it is, how it works, and when it makes sense to include one within your purchase offer.

The Home Appraisal Contingency Explained

This article will make more sense if we define the two terms being used here:

  • A home appraisal is a process through which a property appraiser evaluates a home to determine its current market value. Appraisals are required for nearly all mortgage loans in Washington.
  • A contingency is a specific situation or condition that must occur before a real estate transaction can proceed to closing. There are several different kinds of contingencies used by home buyers, including the appraisal contingency.

Put these two things together, and you have a contract contingency that allows a buyer to back out of the deal in the case of a low home appraisal. If the appraiser determines the house is worth less than the amount you’ve agreed to pay for it, this contingency could allow you to exit the transaction and recover your earnest money.

There’s usually a timeframe included with these clauses as well. For instance, the appraisal contingency might state that the buyer has 21 days from the contract’s effective date to make a decision based on the appraisal report.

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When a Home Appraises Below the Purchase Price

Banks and mortgage lenders use home appraisals to make sure they’re not lending more than the house is actually worth.

In some cases, the property appraiser will determine that the house is worth the amount the buyer has agreed to pay for it – or even more than that. Other times, the appraisal might “come in low,” meaning it falls below the mutually agreed-upon purchase price.

Home buyers basically have three options when an appraisal comes in low:

  • They can ask the seller to reduce the sale price to reflect the appraised value.
  • They could come up with the difference out of pocket, with more money down.
  • They could walk away from the deal and find another home to buy.

The third scenario is where the home appraisal contingency comes into the picture.

Most home buyers in Washington State include an earnest money deposit when making an offer on a house. This is common practice, and it shows the seller you’re serious about buying their home. An appraisal contingency can protect this deposit, in the event that you back out of the deal due to a low appraisal.

The question is, should you include an appraisal contingency when buying a home in Washington? Ultimately, this choice is yours to make. And you’ll want to consider local real estate market conditions when making it.

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What’s Your Local Real Estate Market Like?

Home appraisal contingencies are a common feature among real estate contracts in Washington. But there are times when they could work against you, as a home buyer.

When you add contingencies to your contract, you’re protecting yourself from things that are beyond your control. But you could also be making things more complicated for the seller, and that’s something to bear in mind.

In a highly competitive real estate market, where sellers have more bargaining power, they might be inclined to reject offers that include contingencies. In such a market, the seller might receive a dozen or more offers within the first week. This gives them the luxury of choosing what they feel is the best offer.

With multiple offers to choose from, a homeowner might lean toward the “clean” offers that do not include contingencies. And they might be less inclined to accept an offer with multiple contingencies attached, or one that asks for closing cost contributions.

But in a slower real estate market, where buyers have more negotiating leverage, home appraisal contingencies are generally more acceptable. In fact, some buyers include multiple contingencies within their purchase offers (appraisal, inspection, financing, etc.).

Ultimately, you have to create the kind of real estate contract you’re comfortable signing. If that means you need to use an appraisal contingency to protect your deposit money, then by all means do so. Just know that it might affect the way the seller perceives your offer.

If you’re working with a real estate agent, be sure to seek their advice on this matter. Experienced agents deal with purchase offers on a regular basis, sometimes handling several of them every month. This allows them to “test the waters” and see how sellers respond to different types of offers. And that’s valuable insight to have when buying a home in Washington.

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