Risks of Waiving the Appraisal Contingency

In today’s market buyers who are planning to write an offer on a property in a multiple offer situation have difficult decisions to make. In order to be competitive they must write their offers without contingencies. Otherwise, they have a greatly reduced chance of getting the house they want.

The appraisal contingency is one of the contingencies that sellers do not want to see in the offer. Prices are on the rise in many areas but appraisals don’t always immediately catch up to these sudden increases, despite efforts by agents try to keep appraisers informed of the latest sales. If a property appraises for less than the offered price, the buyer will be forced to come up with extra cash for a larger down payment or risk breaching the contract.

In response to rapidly increasing prices, the California Association of REALTORS® created a form called “Market Conditions Advisory” that is usually part of our local disclosure package. Buyers have to read, acknowledge and sign sign-off on all the documents in the package. The form includes a statement that the purchase price offered by a buyer is his decision, not the real estate agent's. It also states that making an offer without contingencies — such as the appraisal contingency — is not recommended by the real estate broker.

Buyers should discuss this disclosure and waiver of the appraisal contingency with their agent. Using recent market sales data, buyers and their agent should try to estimate a likely range of appraised values for the property, so that the buyers can determine whether they have the financial flexibility to close the transaction if the property appraises for less than the offered price.