Appraisal Contingency: What Is It and Do I Need It?

When you’re drafting an offer to buy a home, contingencies offer financial protections for buyers in case the offer doesn’t proceed as expected. An appraisal contingency is one of the most commonly included contingencies for residential home buyers in addition to financing contingencies and inspection contingencies.

What is an appraisal contingency?

An appraisal contingency is a clause included in a real estate purchase contract that allows the buyer to walk away from the deal and retain their earnest money, or renegotiate if the appraisal on a home comes back below the agreed-upon purchase price. It protects the buyer from being contractually obligated to overpay for a property. 

Understanding home appraisals

When you’ve found a home you want to buy, you and the seller will work to agree upon a purchase price. If you are using a mortgage loan to finance your purchase, your lender will want to ensure that you aren’t overpaying for a house, since they have a financial interest in the property. To prevent overpaying, most lenders require that a professional appraisal be completed. An appraisal is an official report of a home’s current value. As the buyer, you want the appraisal to come back either at the sale price or higher to qualify for the mortgage. A high appraisal is a sign of a good investment. 

Talk to a mortgage expert to learn more about getting pre-approved for a loan and learn more about home appraisal requirements.

What are appraisers looking for?

A professional appraiser’s goal is to determine the current value of a home, based on its attributes and local market trends. They’ll seek out three similar nearby homes that have sold within the last 90 days. These are called comparables, and they allow the appraiser to make side-by-side comparisons and determine a fair value.

How does an appraisal contingency clause work?

When you submit a purchase and sale agreement to buy a home, you’re allowed to include an appraisal addendum that states that the sale will only go through if the home appraises at or above the sale price. If the appraisal comes in low, it gives you the ability to renegotiate the sale price with the seller or abandon the deal completely—without losing your earnest money.

After the seller accepts the offer, contingencies included, you’ll begin the official loan application process. The appraisal will follow shortly thereafter.

As the buyer, you’re responsible for paying for the appraisal. It’s typically paid up front, but can also often be rolled into the loan. 

Once the appraisal is complete, the lender will let you know the results, whether it’s good news—the appraisal came in at or above the purchase price—or not-so-good news—the appraisal came back low. Note that the seller will not see the appraisal report unless you choose to share it.

Can an appraisal contingency be waived?

While your lender will likely require an appraisal, you can choose to waive an appraisal contingency but it is risky. By waiving the contingency, you’re committing to purchasing the property at the agreed-upon price, regardless of the appraisal outcome. That means you may need to make up the difference between the appraised value and the sale price in cash. This strategy is more common in competitive markets where you are confident in the property’s value and want your offer to stand out.

What happens if the appraisal is lower than the sale price

With an appraisal contingency: With an appraisal contingency in place, you have a few options. First, you can simply walk away from the deal, earnest money in hand. Or, you can work with the seller to renegotiate the purchase price to more accurately reflect the appraised value. Finally, you could choose to pay the difference between the appraisal amount and the sale price, effectively increasing your down payment to appease your lender.

Without an appraisal contingency: Without an appraisal contingency, your loan may be denied unless you increase your down payment amount. If you can’t or don’t want to bring more cash to closing, you will need to walk away from the sale, forfeiting your earnest money.

What happens if the appraisal is higher than the sale price

With an appraisal contingency: If your appraisal comes in above the sale price, this is good news for the buyer. You’ll have instant equity when you move in! In other words, your home will almost immediately be worth more than you paid for it, giving you the financial flexibility to resell or refinance as needed.

Without an appraisal contingency: A high appraisal is especially good news for buyers without an appraisal contingency. This means your purchase can move forward without needing to bring extra cash to closing.

Benefits of including an appraisal contingency

For buyers, there are a lot of reasons why it makes sense to include an appraisal contingency with your offer.

Financial protection: With an appraisal contingency in place, you have peace of mind in knowing that you won’t be obligated to buy an overpriced home.

Negotiating power: An appraisal contingency allows you to renegotiate the terms of the purchase based on the results of the appraisal.

Flexibility to walk away: An appraisal contingency ensures you can get your earnest money back and abandon the deal if the appraisal doesn’t align with the purchase price.

Why not include an appraisal contingency?

While there are many benefits to including an appraisal contingency, there are some downsides. 

Less competitive offer: In a competitive real estate market where sellers have their pick from multiple offers, they may overlook your offer, instead choosing one with fewer contingencies and fewer barriers to closing.

Potential renegotiation: If the appraisal comes back low and you have to renegotiate with the seller, other concessions that may have previously been offered may no longer be on the table. For example, let’s say the seller previously offered to cover some of your closing costs. Now that they must lower the price, they may no longer be inclined to cover this expense for you in order to close the sale.