Did you know…?
An Appraisal Contingency Addendum can reduce the stress of appraisals and negotiations in real estate transactions.
This standard form can be added to an Agreement of Sale to make it clear how a buyer will respond to any appraisal problems. If the property appraises at or above the listed value, the transaction moves forward. If the property appraises for less than the listed value, that’s where things get interesting and this form helps the most. Rather than hope the property appraises for the expected value, plan ahead with this easy addendum.
An Appraisal Contingency Addendum isn’t just good for buyers: it’s good for sellers, too. With how long we’ve been away from a “traditional market,” I wanted to take some time and explain a bit about this helpful page that can be added to an Agreement of Sale. After all, it’s basically a clause in an agreement that says what happens after the property is appraised. That provides a peace of mind everyone can enjoy.
Join me this week as I outline what the Appraisal Contingency Addendum is and why buyers and sellers might want one included in the Agreement of Sale!
What is an Appraisal Contingency Addendum?
In the world of real estate, an Appraisal Contingency Addendum is one of many optional additions to the standard Agreement of Sale. It’s designed to structure how buyers tell sellers how the transaction will move forward after any appraisals. While negotiations around property values can become heated, there’s a lot less stress when all parties know the options ahead of time.
The current form to add this type of addendum to an Agreement of Sale is a single page that can cut out days of stress and uncertainty. In addition to putting on paper what the buyer expects the house to appraise for, this addendum clearly outlines what will happen if a property appraises above or below the price listed in the agreement.
The best news for sellers is that this locks buyers in should the property appraise for at least as much as the agreed price. If a property appraises for less than the agreed price, there are two options. Which option kicks in is based on what buyers choose when adding an Appraisal Contingency Addendum.
The first option is to tell sellers the buyer can terminate the agreement if the property does not appraise for the expected value. This option still leaves the possibility of negotiating on the table. The second option is to tell sellers the buyer is dedicated to the transaction and would like to negotiate options with the seller if the property appraises low.
A lot of buyers have been trying to make their offers as appealing as possible in the seller’s market we’ve been stuck in these past few years. Sometimes, this meant including as few contingencies as possible to try and make their offer more desirable to sellers. The mortgage lenders and cash buyers, on the other hand, continue to protect their interests. Rather than let a real estate deal fall through because of the financing after the fact, why not add an Appraisal Contingency Addendum to the Agreement of Sale and plan ahead?
Why would someone want an Appraisal Contingency Addendum?
While there are as many reasons to include an Appraisal Contingency Addendum as there are reasons to move, in today’s market there are 4 big reasons:
1.) Buyers using a mortgage may anticipate overbidding, given current market conditions.
2.) Cash buyers may be sensitive to pricing.
3.) Any buyer may be concerned about rapidly changing home values.
4.) Sellers may be more confident knowing what to expect.
1.) Looking at the hot sheets every day, I’ve noticed an interesting trend in our local market. Many homes are being bid up in price, closing for well over the initial asking price. For buyers using a mortgage, the final sale price compared to the property valuation can impact their ability to qualify for that mortgage. Including an Appraisal Contingency Addendum shows the buyer is planning ahead for this situation, demonstrating their commitment to the deal.
2.) In today’s market, statistics show more than 1/3 of real estate transactions involve cash buyers. The standard Agreement of Sale presented by the Pennsylvania Association of Realtors© includes contingencies for buyers using a mortgage, but not for cash buyers. This addendum lets cash buyers elect to have the same protections that a buyer using a mortgage has in the standard Agreement of Sale. With a growing trend of cash buyers, I expect to see this included more and more frequently.
3.) While many properties are selling in record time, others linger on the market. With home prices changing month to month, and so few timely comparable sales, this can mean the valuation of a home can differ dramatically. Buyers who are wary of this, or who are concerned that the asking price does not reflect the actual value of the property, can opt to use an Appraisal Contingency Addendum to protect themselves from these volatile price changes. This goes the same for cash buyers and those using a mortgage.
4.) Appraisal Contingency Addendums are good for sellers, too. They let sellers know how serious a buyer is, provide a clear framework for working through appraisal concerns, and cut down on the headache and scrambling after an appraisal comes through. An addendum like this, that clearly outlines how the buyer and seller will move forward after the property appraisal, is really a good idea.
Conclusion
During real estate transactions, there are so many moving pieces that could cause the entire transaction to fall apart. Buyers who plan ahead and include an Appraisal Contingency Addendum with their Agreement of Sale demonstrate a willingness to both get the deal done right and work to make sure there are as few surprises as possible. This single addendum makes sure everyone involved is on the same page when it comes to how appraisals could effect the transaction. In today’s sellers’ market, rather than be scared off by a buyer who knows what they’re doing, be glad they’re not trying any funny business.
Thank you for joining me on another journey into the nitty-gritty of real estate! I hope this has been helpful, and maybe even educational. Do you know someone who might want to know about this bit of paperwork, or any of the other forms? Let me know, I’d love to talk with them! As always, I aim to provide content that’s interesting for you. If you have any suggestions for my future articles, please send them to [email protected]. I look forward to reading your questions and suggestions!
