Typically, mortgage lenders will insist that an independent home appraisal be done before closing. This gives lenders confidence that the value of the home is sufficient to recover the balance of the mortgage loan if the borrower defaults and the bank has to foreclose. An appraisal contingency is a term in the Purchase Offer & Sale contract for the sale of a home that allows buyers to walk away from a deal if their lender’s appraisal is materially lower than the price the buyer has offered to pay in her offer.
We’ll be honest: the appraisal generally comes in around the purchase price. In open market transactions, we’ve never seen a lender’s appraisal come in materially lower than the price a buyer has offered to pay for a home in the Bay Area. One potential explanation for this is that the Bay Area is such a competitive market, with most properties receiving multiple offers and bids, that by definition the amount that a bona fide buyer is willing to pay for a home is the fair market value. Given the exceedingly high likelihood that a Bay Area home is appraised at exactly the value a prospective buyer has offered to pay, we think it’s low risk for buyers to waive the appraisal contingency.