Is It Risky to Make an Offer Without an Appraisal Contingency ?

By Dian Hymer

When bidding on a desirable home, buyers often wonder what it takes to win in a multiple offer competition. The winning offer usually has the highest price, the fewest contingencies and the quickest close.

Absent competition, most home purchase contracts include contingencies to protect the buyers. A contingency is a provision in the contract that must be met in order for the sale to go through. If a contingency can't be satisfied, the buyers are usually released from the contract and their deposit money is returned.

The most common contingencies are for buyers' financing and inspections. If the buyers need to sell a home in order to complete the purchase, the offer might also include a contingency for the sale of the other property (called a contingent sale clause). The number of contingencies included in a contract, and the time periods for satisfying those contingencies, is subject to negotiation between the buyers and sellers.

When listings are in short supply and buyers are plentiful, buyers end up competing with one another. In order to better an offer in a competitive bidding situation, some buyers waive contingencies that would otherwise be included in their offer.

The contingency that is most frequently omitted when there is competition is the financing contingency. A financing contingency makes the contract contingent upon the buyers' ability to obtain approval for the mortgage(s) they need to close the sale. If the buyers try to get financing but are unable to, they are usually released from the contract without penalty.

First Time Tip: Generally, it's risky to make an offer without a financing contingency unless you have been preapproved for a mortgage. Preapproval is a formal process whereby the buyer submits a loan application to a lender along with supporting documentation like verifications of employment and down payment funds. The buyer's credit is checked and an underwriter reviews the buyer's loan package. If all is satisfactory, the lender issues a letter stating that the buyer is approved for a mortgage of a specific amount. The letter may also indicate the type of loan, the interest rate and terms, and the expiration date of the loan commitment. You can get preapproved either by going directly to a lender or by working through a mortgage broker.

A buyer who is preapproved doesn't need to include a contingency for loan qualification, as long as their preapproval letter is current. A preapproved buyer has loan approval for the mortgage he or she needs to close the sale. However, the lender's approval is subject to the buyer finding a property that is acceptable to the lender.

An acceptable property from the lender's viewpoint is one with a good title report that appraises for the purchase price. So what happens if you make an offer that doesn't include contingencies for loan approval and property appraisal and the property appraises for less than the purchase price?

Without a contingency to protect you, you could risk losing your deposit if you back out of the deal. Another option is to increase the amount of your cash down payment to make up the difference.

Before you make an offer without an appraisal contingency, ask your agent for comparable sales information. Find out if it's a safe bet that the property will appraise for the price you're paying. Then make sure your lender uses an appraiser who specializes in the area in which you're buying.

The Closing: If the title report on the property turns up something unacceptable, you may be protected by the title clause that's included in most residential purchase agreements.