About to remove your appraisal contingency? Read this first.

You need to be very careful when you are considering removing your appraisal contingency, because it’s very easy to get burned.

To understand why, we need to look at what an appraisal contingency is. Here’s the relevant language from paragraph 3I the California Association of Realtors multi-family agreement:

“This Agreement is contingent upon a written appraisal of the Property by a licensed or certified appraiser at no less than the specified purchase price.”

The purpose of this language is to protect the buyer in two ways: (1) By allowing him to back out of the deal if it turns out the property is worth less than he thought it was, and (2) by allowing him to back out if the bank won’t loan the full amount required by the contract because the value of the property is too low. (Note that, if there is a separate loan contingency, #2 is sort of covered by the loan contingency, too.)

Once the appraiser comes out, examines the property, and issues a report saying the property is worth at least the purchase price, most buyers and agents figure they should tell the seller and remove the appraisal contingency.

But caution is required. Notice that the language above does not say anything about the bank accepting the appraisal. And that is the source of a lot of grief for buyers. The bank’s underwriter has the right to reject an appraisal if she thinks it is BS (which many of them are!). In that case, the bank will typically order a second appraisal or the buyer can decide to try to challenge the appraiser’s conclusions.

The problem is that, technically, the language in the contract does not protect you that well. After all, it doesn’t say the deal is contingent upon the lender accepting the appraisal. So, once you disclose to the seller that the appraisal has hit price, he’s within his rights to ask you to remove the appraisal contingency. You can find yourself in a scenario where the seller is asking you to remove your appraisal contingency even though the bank has rejected the appraisal!

My advice is therefore not to rush to tell the seller or remove the appraisal contingency as soon as you hear the appraisal has come in at value. Instead, that’s your signal to start pushing very hard on the lender to let you know if they are willing to accept the appraisal. Often, they can make this happen a day or two after receiving the report. Ideally, you wait until then to advise the seller that the appraisal has come in at value and then to remove your appraisal contingency.