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.
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.
Contest the first appraisal. Appraisals are subjective and can be disputed. If you disagree with an appraisal, you can ask for a second opinion.
Pay more down payment. You could agree to pay the difference between the appraised value and the sale price on top of your down payment.
Renegotiate. You can ask sellers to bring the sale price down to the appraised value.
Reduce the price. You can lower the sale price to the appraised value.
Make essential repairs. If the appraised value is lower because of problems with the house’s structure or a general lack of care, you could address those issues and have the house reappraised.
Offer seller financing. You could lend buyers the difference to keep the deal intact. For instance, if a home appraises $10,000 below the sale price, you could lend $10,000 to the buyer, who would then use that money in their down payment.
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.
You’re confident the home won’t appraise for less. You may have already appraised the home, or you know the sale price is very close to similar homes that have recently sold in the same area.
You have enough cash reserves to make up the difference. If you have more than 20% of the sale price in cash, you might be okay waiving the appraisal contingency.
You’ve discussed it closely with your agent. You may be buying a home in a hot sellers market in which appraisal contingencies are uncommon. If your agent feels strongly that you should waive the contingency, you might have to in order to stay competitive.
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.
A hot market. Contingencies may be rare in your area, especially if you live in a seller’s market. Your agent can help you decide if it’s a common practice in your market to include appraisal contingencies in an offer.
A hurry to sell. Although it’s rare for an appraisal contingency to come back significantly lower than the sale price, it can present a major disruption if it does. If the deal falls through, you’ll have to relist your house, which translates to lost time and money.