In a competitive real estate market, buyers sometimes waive their appraisal contingency to strengthen their offer and appeal to sellers seeking a smoother transaction. An appraisal contingency typically protects buyers by allowing them to back out, renegotiate, or request a price reduction if the home appraises for less than the purchase price. Waiving this contingency removes that protection, meaning the buyer agrees to pay the full contract price, regardless of appraisal results.
For example, if you offer $550,000 and the appraisal comes in at $525,000, the lender will only finance the appraised $525,000. Without the contingency, you must cover the $25,000 difference out of pocket, increasing your upfront costs.
While this waiver can give you a competitive edge in a seller’s market by signaling financial commitment and certainty, it carries significant risks, including potentially paying more than the home’s market value (negative equity) and losing a substantial amount if unable to cover the appraisal gap.
A less risky alternative is the appraisal gap clause, which limits your obligation to cover a gap up to a specified amount, offering some protection against large appraisal shortfalls.
Before waiving your appraisal contingency, consult your real estate agent and lender to evaluate your financial ability, the local market conditions, and comparable sales. Understanding these factors is crucial to making an informed decision and avoiding unexpected financial strain.
For more on appraisal contingencies, see our Appraisal Contingency guide.
Additional insights on contingencies in home purchase contracts are available from the Consumer Financial Protection Bureau: What is a contingency in a home purchase contract?.
