Frequently Asked Questions About Appraisal Contingencies

A contingency is an escape clause that allows buyers and sellers to break a contract without penalty if certain things don’t go as expected. Many contingencies protect buyers from losing their earnest deposit if specific conditions aren’t met.

Many buyers will add an appraisal contingency to their offer letter, allowing them to back out if the home’s appraised value is lower than the sale price. For example, if a home's sale price is $300,000, but the appraised value is $275,000, an appraisal contingency allows the buyer to walk away from the deal with their earnest money firmly in hand.

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What happens if the appraisal is lower than the offer?

Lenders rarely approve loan amounts greater than the appraised value. Typically, they’ll ask the buyer to renegotiate for a lower price. Or they’ll lend only the appraised amount, so the buyer pays the difference.

Both buyers and sellers can do a few things to keep the deal intact. And if they aren’t willing to negotiate, either can break the contract and walk away without penalty.

The appraisal gap is the difference between the sale price and the appraised value. An appraisal gap contingency means that buyers agree to pay a fixed, predetermined amount over the appraised value. So if the gap is greater than that amount, the buyer can walk away without penalty.

For instance, let’s say a home’s sale price is $300,000, and the buyer and seller agree to an appraisal gap contingency of $10,000. The appraisal comes back at $292,000 — $8,000 shy of the sale price. If the buyer walks away from this deal, they'd have to surrender their earnest money.

But if the appraisal comes back at $275,000 (a $25,000 gap), the buyer could walk away with their earnest deposit.

How common are appraisal contingencies?

Appraisal contingencies are nearly standard in offer letters. Buyers will typically waive the appraisal contingency for only two reasons: they’re paying in cash, or they want to be more competitive.

If buyers are paying a substantial amount in cash, it may not matter what the appraised value is. They likely have the cash reserves to make up the difference.

In hot seller’s markets, some buyers will waive the appraisal contingency to stand out.

Do I need an appraisal contingency?

If you’re planning on getting a mortgage, then, yes, it’s wise to include an appraisal contingency in your offer letter.

Appraisal contingencies protect you from locking into an unfair or bad deal. They allow you to:

• Keep your earnest money, which is often 1–3% of the sale price
• Renegotiate the price with the seller, which gives you leverage if the appraisal finds serious issues

Should I waive the appraisal contingency?

Waiving the appraisal contingency can help you stand out from other buyers. But it could also put you in a tough situation financially, since you'll agree to pay the sale price, regardless of appraised value — or force you to surrender your earnest deposit.

Consider waiving the appraisal contingency ONLY if you’re confident the home won’t appraise for less or you have enough cash reserves to make up the difference.

Is an appraisal contingency good for the seller?

Appraisal contingencies could mean more opportunities for a deal to fall through. While rare, if an appraisal comes back significantly lower than the sale price, it could lead to a broken contract with a buyer.

Should I accept an appraisal contingency?

You should accept an appraisal contingency from a buyer if:

You expect the house to appraise for close to the sale price. You have nothing to worry about: appraisal contingency or not, the lender will likely approve the full loan amount.

The market is slow, and you want to hold on to this buyer. You may not have many options. In this case, it’s in your best interest to accept the appraisal contingency.