Yes, you need one!
Home buying can have its headaches, especially when you’re absolutely intent on buying a particular property. That’s why contract contingencies have been developed to protect both buyer and seller from adverse incidents that may arise from the purchase. For example, a home inspection contingency allows a buyer to hire a home inspector who will conduct a separate inspection of the property. On the other hand, a loan contingency contract benefits a seller when a borrower is not granted a loan—even if the buyer possesses a loan preapproval document.
Appraisals have been subject to such buyer protection too. Picture this: a house is currently on the market at $250,000. Assuming that this is a bargain in the area, several buyers express interest, all having different requirements from the seller. Sometimes, those anxious to buy will not ask for an appraisal report. Saving hundreds of dollars, the seller would gladly choose the buyer who doesn’t require the report.
In the course of the transaction, the buyer is required to pay an earnest money deposit worth $30,000 for example. This payment serves as an assurance that the buyer is indeed serious about purchasing the house. Before the transaction is complete, the lender suddenly requires an appraisal of the house, and discovers that the actual value of the property is only $220,000. That’s a $30,000 difference that the buyer has clearly wasted.
The pitied buyer will hardly get 100 percent of the earnest money deposit. In fact, he may not be repaid even a single cent if the seller decides not to refund the money. Should there be a lawsuit, fees will begin mounting. In the end, the buyer could be forced to get another job just to cover the gap that could have been avoided in the first place.
An appraisal contingency plan can help you withdraw from a sale if the house’s appraisal falls short of the sales price in the contract. In case this happens, and with a willing seller, you can discuss a renegotiation of the contract price and from there resolve what needs to be done for a successful purchase.
Some states have enforced this plan strictly. In Utah, buyers are asked to secure one so that they can have all their earnest money returned. In Arizona, this contract stipulates that the house must appraise for the agreed contract price.
Wherever you are, it is necessary that your broker insist on including the appraisal contingency contract even if the borrower is already preapproved.