An appraisal contingency is a clause in your purchase agreement that lets you renegotiate or walk away if the property appraises below the purchase price. It prevents you from being locked into paying more than the home is worth, and without one, you're legally obligated to close even if the appraisal falls $50,000 short.
What Is an Appraisal Contingency?
An appraisal contingency is a clause in your purchase agreement stating: "This offer is contingent upon the property appraising at or above the purchase price."
If the appraisal comes in low (property appraises below purchase price), you have options:
- Renegotiate the price downward
- Walk away from the deal
- Make up the difference in cash
The contingency protects you from overpaying.
Why It Matters
Without an appraisal contingency, you're legally bound to complete the purchase even if the property appraises at $50,000 below your offer.
Example: You offer $500,000. Appraisal comes in $450,000. Without contingency, you must close at $500,000 or face contract breach.
With contingency, you can renegotiate or walk away.
Lender-Required Appraisals
Your lender requires an appraisal. This appraisal protects the lender—if the property appraises low, the lender reduces the loan amount.
But the appraisal also affects you. If it's low, you need to make up the difference in down payment or renegotiate.
Appraisal Contingency Language
Standard contingency language:
"Subject to appraisal: Buyer is not obligated to close if the appraisal value is less than the purchase price. Buyer shall have the right to request a price reduction or terminate the contract."
This protects you clearly.
Low Appraisal Scenarios
Scenario 1: You offer $500k. Appraises at $480k. You can:
- Ask seller to reduce price to $480k
- Make up the $20k difference yourself
- Walk away
Scenario 2: You offer $500k with 20% down ($100k). Appraises at $480k. Lender reduces loan to 80% of appraisal ($384k). You must put down $116k (or walk away).
The appraisal contingency protects you in both scenarios.
Market Risk
In a hot market (2016-2017), appraisals almost always came in at or above purchase price. Contingencies rarely mattered.
In softer markets (2019), appraisals come in low more often. Contingencies matter a lot.
When Sellers Push Back
Some sellers want appraisal contingencies removed. They say: "If appraisal is low, offer without contingency or we're walking."
This is seller leverage. You must decide:
- Is the property worth the risk?
- Can I afford to make up a shortfall if appraisal is low?
- How confident am I that it appraises at the offer price?
Only you can answer these.
Never Waive Appraisal Contingency
I advise buyers: Keep the appraisal contingency. It's critical protection.
Some buyers waive it to make offers more competitive. This is risky.
If appraisal comes in low and you've waived the contingency, you're stuck. No negotiation room.
Real Example
Client A offers $520k with appraisal contingency. Property appraises at $495k. Client renegotiates price down to $500k. Deal closes successfully.
Client B offers $520k WITHOUT appraisal contingency. Property appraises at $495k. Client must close at $520k or lose earnest money and face legal action. Client forced to make up $25k in cash or walk away (losing deposit).
The contingency saved Client A $20k+.
Timing the Appraisal
Appraisals typically happen 3-4 weeks into escrow. This gives you time to:
- Conduct home inspection
- Review preliminary appraisal with appraiser
- Renegotiate if needed
- Walk away if terms aren't acceptable
Don't waive this timeline.
Communication With Appraiser
You can communicate with the appraiser (through your agent):
- Provide comparable sales information
- Share recent improvements documentation
- Highlight property features
This is legitimate and helps ensure accurate appraisal.
What you CAN'T do: offer to pay the appraiser differently based on appraisal value, or pressure them to appraise higher.
The Bottom Line
Appraisal contingencies protect you from overpaying. Keep them unless you have very compelling reason to waive.
In 2019, with market moderating, appraisal contingencies are MORE important, not less.
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Navigating appraisal contingencies? I can help you understand how appraisals affect your purchase. Contact me.