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Contract to closeAppraisal contingency: what happens when the appraisal is low

An appraisal contingency lets the buyer renegotiate or cancel – with the earnest money back – if the home appraises below an agreed value. In Texas, the lender's Property Approval right in the financing addendum (40-11) can be waived, partly waived or extended with TREC addendum 49-1. In California, the RPA's appraisal contingency runs 17 days by default and is separate from the loan contingency.

When the appraisal comes in low

  1. Renegotiate

    The seller lowers the price to the appraised value, or the parties meet in between.

  2. Pay the gap

    The buyer brings extra cash to cover the difference between the price and the appraised value.

  3. Challenge the appraisal

    The lender may consider a reconsideration of value with comparable sales.

  4. Cancel

    If the contract gives an appraisal right and the deadline has not passed, the buyer may terminate and get the earnest money back.

Texas: TREC 40-11 and addendum 49-1

  1. Property Approval (40-11 ¶2B)

    If the lender determines the property does not satisfy its underwriting requirements – including the appraisal – the buyer may terminate on or before the 3rd day before closing with the lender's written statement; earnest money refunded.

  2. 49-1 (1) Waiver

    The buyer waives that right if Property Approval fails because of the appraised value; if the loan is reduced, the cash portion of the price increases by that amount.

  3. 49-1 (2) Partial waiver

    The buyer waives it only if the appraised value is at least the amount written in the addendum.

  4. 49-1 (3) Additional right

    The buyer may also terminate within the days written after the effective date if the lender's appraisal is below the amount written and the buyer delivers a copy of the appraisal; earnest money refunded.

  5. Not for FHA or VA

    49-1 is used only with the Third Party Financing Addendum and not with FHA-insured or VA-guaranteed loans, which have their own appraisal clause (40-11 ¶4).

California: the RPA appraisal contingency

  1. 17 days

    By default 17 days after acceptance, removed in writing.

  2. Separate from the loan

    Removing the loan contingency does not remove the appraisal contingency.

  3. Value only

    The appraisal contingency is limited to the appraised value; square footage questions fall under the investigation contingency.

Questions about appraisal contingencies

What is an appraisal contingency?

A contract term that lets the buyer renegotiate or cancel with the earnest money back if the home appraises below an agreed value, within the contract's deadline.

What happens if the appraisal is low and there is no appraisal contingency?

The buyer usually has to cover the difference in cash or risk the earnest money if they cannot close.

What is the TREC appraisal addendum?

TREC 49-1, Addendum Concerning Right to Terminate Due to Lender's Appraisal: waiver, partial waiver above a stated value, or an additional right to terminate within set days if the appraisal is below a stated amount.

How long is the appraisal contingency in California?

By default 17 days after acceptance under the C.A.R. RPA, unless the contract states another number.

Does removing the loan contingency remove the appraisal contingency?

Not in the California RPA – each is removed separately.

Related

ClosingCode puts the appraisal and financing deadlines on the timeline from the contract and reminds the buyer's side before each one.

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Sources: TREC No. 49-1 (11-15-18, effective March 1, 2019); TREC No. 40-11 ¶2B and ¶4; C.A.R. RPA revised 12/22 ¶3L(2) and ¶8. The options in the first section are general market practice.

General information, not legal advice. ClosingCode is software; it is not a law firm or brokerage.