What is an Appraisal Contingency?

Contingencies are like safety nets, protecting buyers from unexpected twists. And one of the most popular safety nets buyers rely on? The appraisal contingency typically goes hand in hand with a financing contingency. It’s the clause that says, "Hold on a sec—let’s make sure this house is worth what I’m about to pay."

An appraisal contingency gives a buyer some options if a property is valued lower than the listing price. These options can range from allowing the buyer to terminate the transaction and walk away with their earnest money deposits, to the seller and buyer agreeing to lowering the purchase price to the appraisal amount, to the other end of spectrum, the buyer agreeing to make up for any shortfall with extra cash out of pocket.

Think of it as a check-and-balance system for both buyers and lenders. After all, no one wants to pay top dollar for a home only to find out it’s worth much less in the eyes of an appraiser. With this contingency, buyers and lenders gain peace of mind, knowing they’re not walking into an overpriced deal.

But why the fuss over a few appraiser calculations? In today’s competitive market, it’s common for buyers to bid over the asking price to stand out amid multiple offers. That’s where the appraisal contingency swoops in, acting as a guardrail, ensuring everyone’s investment stays grounded in real value. Let’s dive into how it all works.

Key things to know about appraisal contingencies

• How an appraisal contingency works
• Why is an appraisal contingency used?
• What happens if an appraisal comes in low?
• Pros and cons of appraisal contingencies
• How appraisal contingencies impact sellers
• Waiving an appraisal contingency
• What buyers should consider about appraisal contingencies

How an appraisal contingency works

When a buyer includes an appraisal contingency in their offer, they’re basically saying, "If the appraised value of this home doesn’t match or exceed what I’m offering, we need to talk." 

Here’s the drill: once an offer is accepted, the buyer’s lender orders a home appraisal - usually conducted by a third-party licensed appraiser. This professional reviews the property, noting details like square footage, condition, and recent comparable sales nearby. The appraiser then formulates a detailed report with his/her findings and suggests a value that the home is worth. This value may or may not be what the price the buyer and seller have agreed to.

The appraisal report reveals what the appraiser believes the property is worth in today’s market. If the appraisal meets or exceeds the offer price, great. The deal moves forward smoothly. But if it falls short, things get a bit more complicated. That’s when the appraisal contingency proves its worth by giving the buyer options: renegotiate the price, pay the difference, or walk away—no harm, no foul.

This contingency ensures buyers don’t pay significantly more than the property’s worth, while lenders get assurance they’re not financing more than the asset can back. In a nutshell, it’s a fair deal for all.

Why is an appraisal contingency used?

For buyers, an appraisal contingency is like a financial firewall—it prevents them from overpaying for a property, especially if the market is heating up faster than a Miami summer. Think of it as an insurance policy against over-enthusiastic bidding. In hot markets, buyers might offer tens of thousands over the asking price (or even more) just to secure a home, but with an appraisal contingency in place, they have the freedom to rethink that number if the appraisal doesn’t match.

Lenders, too, find comfort in the appraisal. After all, they’re footing a good portion of the bill through financing, and they want to know that the collateral (aka the house) is worth at least the loan amount they’re giving out. Without this assurance, banks could end up backing deals on properties that don’t support their loan amount, which is risky for all parties involved.

Plus, markets can be volatile. A high-demand neighborhood today might see a dip tomorrow. With an appraisal contingency, buyers and lenders can navigate market fluctuations confidently, knowing that an unbiased appraisal will help keep everyone grounded.

What happens if an appraisal comes in low?

Let’s imagine the appraiser’s report is in, and it’s not what the bank or the seller were hoping for—the appraised value is lower than the sale price. 

When an appraisal comes in low, the buyer potentially has several options. The first option is to head back to the negotiating table and ask the seller to lower the price to match the appraisal. If the seller is motivated, they might agree, especially if they’re eager to close the deal. Second, if the seller is firm on their price, the buyer can cover the difference out of pocket, essentially making a larger down payment. This route can sting a bit but is sometimes worth it in highly competitive real estate markets or for a dream property, if you have the necessary funds.

The third option? Use the appraisal contingency to walk away from the deal with your earnest money intact. While it may feel disappointing, remember that it’s ultimately an intelligent financial decision. After all, the whole point of this contingency is to protect you from overpaying. A low appraisal isn’t ideal, but it’s a valuable reality check—and a chance to renegotiate or rethink your options.

Keep in mind, with all of the options discussed above, this is not typically a carte blanche choice in the event a low appraisal occurs. In the majority of real estate transactions, the appraisal continency options are explicitly agreed upon in the real estate contract at the outset of the deal to avoid any confusion later. The specifics of the appraisal contingency is sometimes a point of negotiation before a buyer’s offer is formally accepted by the seller.

Pros and cons of appraisal contingencies

Like any offer term in a contract, there are pros and cons to using an appraisal contingency in a real estate purchase. Further, the pros and cons are amplified depending on the strength of the market – is it a seller’s market or a buyer’s market? 

If it’s a seller’s market, buyers will typically use the appraisal contingency to outline how they’ll fund with cash any potential appraisal shortfall (and will need to show sufficient proof of funds in accounts in order to do so), or else their offer will be less attractive than others in a best and final bid scenario. 

Alternatively, in a buyer’s market the buyer will typically elect to terminate the deal and walk away if the appraisal comes in low. While most sellers won’t like to agree to that, assuming there are no other offers and options, a desperate seller will have no choice but to agree to it.

Pros of an appraisal contingency

An appraisal contingency is all about peace of mind. It’s a security blanket for buyers and lenders, ensuring no one is paying more than they should and reducing the risk of losing your earnest money. By including this contingency, buyers have a built-in safety net that allows them to renegotiate or walk away if the property doesn’t appraise as expected. This is especially valuable in a market where prices are unpredictable.

Another benefit? Flexibility. If the appraisal meets the offer price, the transaction continues along! If not, the buyer has options to negotiate and potentially save thousands. It’s also a practical way for buyers to avoid feeling trapped in an overpriced property, which can be remarkably freeing in a high-stakes, high-cost market.

Cons of an appraisal contingency

On the flip side, an appraisal contingency can make a buyer’s offer less competitive, especially in a market where sellers are flooded with bids. Sellers might gravitate towards offers with fewer contingencies, considering them "cleaner" and more likely to close without hiccups. And for buyers, the process can lengthen the timeline, adding a few extra days or weeks to the closing process. Still, for those who prioritize financial protection, the pros can far outweigh the cons.

How appraisal contingencies impact sellers

An appraisal contingency can be a mixed bag for sellers. On one hand, it introduces a layer of uncertainty. If the appraisal doesn’t match the purchase price, sellers may be forced to lower their price or risk losing interested buyers whose lenders will request their own appraisals. 

However, understanding this contingency also empowers sellers. Knowing that a low appraisal could affect the sale, savvy sellers can prepare by getting a pre-listing appraisal to gauge a realistic market price. This can help prevent surprises and give them a solid foundation when negotiating with buyers.

Ultimately, a well-informed seller can use the appraisal process to their advantage by setting a price that aligns with market conditions or being ready to handle any negotiation curveballs if the appraisal comes in lower than expected.

Waiving an appraisal contingency

Some buyers may consider waiving their appraisal contingency in a red-hot market to make their offer stand out. It’s a bold move and can strengthen an offer’s appeal—but it’s not without risk. By waiving this contingency, the buyer agrees to move forward with the purchase regardless of the appraisal outcome.

Waiving can be a powerful play in a competitive situation, but buyers must be prepared to cover any shortfall between the appraisal and offer price out of pocket. In addition, sellers will typically want to see proof of sufficient assets to cover a large amount in the event of a low appraisal. This can add significant financial pressure, especially if the gap is more extensive than expected. It might be worth the risk for buyers who are well-versed in the market and have the financial means to do so.

For others, keeping the appraisal contingency intact might be the safer route, providing a protective barrier in case the appraisal falls short. At the end of the day, waiving this contingency should be a well-considered decision, weighed carefully against the risks and rewards.

What buyers should consider about appraisal contingencies

One common question buyers have is, "How often do appraisals come in low?" While it varies by market, low appraisals are more common in rapidly appreciating areas where home prices outpace appraised values. Buyers should be prepared for this possibility, especially if bidding in a competitive area.

Another frequent question is, "Should I always include an appraisal contingency?" While it’s often recommended, some buyers in ultra-competitive markets may choose to waive it. This decision depends on individual risk tolerance and financial resources.

Lastly, buyers often wonder, "What can I do to prepare for a low appraisal?" A solid step is communicating with your lender and real estate agent about the market dynamics and getting a realistic sense of the appraisal process. These small preparations can make a big difference, ensuring you’re ready for whatever the appraisal report might bring.

Also, in the event the appraisal value comes in higher than the purchase price, buyers need not worry! Sellers do not get to adjust the purchase price higher. The agreed upon purchase price in the contract stands.

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