What Is An Appraisal Contingency? When to Include One in Your Offer

Key takeaways

• An appraisal contingency gives the home buyer the option to renegotiate or back out of a deal if the home appraises for less than the purchase price.
• If the home appraises for the same or more than the agreed-upon purchase price, the deal continues as planned.
• You may choose to waive an appraisal contingency to make your offer more attractive or if you’re confident in the home’s value, but it’s risky.

Whether you’re a first-time home buyer or seasoned buyer looking to upgrade or downsize, navigating the home buying process can be daunting. Between pricing decisions and contract terms, buyers often face financial risk if a home doesn’t appraise as expected. This is where appraisal contingencies enter the picture. In this Redfin article, we’ll explore exactly what an appraisal contingency is, when they should be included, and how they can help you get maximum value on a house.

What is an appraisal contingency?

An appraisal contingency is a clause in a real estate purchase agreement that allows the home buyer to back out of the transaction or renegotiate the terms of the sale if the home appraisal comes in lower than the agreed-upon purchase price.

When should I include an appraisal contingency in my offer?

In most cases, it’s wise to include them in your offer, as they can prevent home buyers from paying more for a house than it’s worth. Contingencies are meant to provide a safety net for home buyers, and appraisal contingencies are no different. Additionally, they allow you to get your earnest money deposit back if the appraisal report causes the deal to fall through.

That said, in competitive housing markets, buyers sometimes waive appraisal contingencies to make their offers more appealing—accepting more financial risk in the process.

How do appraisal contingencies work?

When an appraisal contingency is present, the sale hinges on the house being appraised for a certain value. Here’s how it works:

1. The buyer and seller agree upon a purchase price for the house.
2. The buyer applies for a mortgage. Here, the lender requires an appraisal to determine the home’s value.
3. A licensed real estate appraiser evaluates the home to determine its value.
4. If there’s a high appraisal, meaning the appraised value is the same or greater than the agreed-upon purchase price, the sale proceeds.

If the appraised value is less than the agreed-upon purchase price, the buyer can renegotiate the price, bring additional cash to closing, or back out of the sale without penalty.

Pros and cons of appraisal contingencies

Appraisal contingencies can really come in handy for home buyers, but that doesn’t mean there aren’t drawbacks. Understanding the pros and cons can help home buyers prepare for a home appraisal if they choose to include one before putting pen to paper.

Pros of appraisal contingencies

• The buyer isn’t stuck purchasing an overpriced house if the appraised value is lower than the agreed-upon price.
• The buyer can renegotiate the terms of the purchase if the agreed-upon price exceeds the appraised value.
• The buyer can terminate the deal and get their money back if the appraised value is lower than the agreed-upon purchase price.

Cons of appraisal contingencies

• Sellers may favor an offer without an appraisal contingency, especially in a competitive market.
• If the seller refuses to lower the price after a low appraisal, the deal may fall through.

What do appraisers look for?

The appraisal value is important in determining the maximum amount a lender is willing to finance and helps the buyer and seller negotiate a fair price. The appraisal value is determined by a licensed appraiser who evaluates the home’s market value. Certified appraiser John Mulligan of Maui Aina Appraisal Company notes the following factors: 

• Property characteristics: the configuration, improvements, and amenities of a home, such as the square footage, the number of bedrooms and bathrooms, the age of the property, and any unique features like a pool or fireplace. 
• Location: The location of the house, including the neighborhood, nearby amenities, and school district.
• Comparable properties: The house is compared to three other comps (recently sold properties within the last 90 days) that are similar in size, age, and features.
• Condition of the home: The condition of the home, including any needed repairs or updates.
• Market trends: Local market trends and economic conditions that may affect the value of the house are considered.
• Zoning and use restrictions: Any zoning or use restrictions that may affect the value of the home are taken into account.

Can an appraisal contingency be waived?

Yes, you can waive an appraisal contingency, but it’s risky. Consider waiving an appraisal contingency if:

• You are making a cash offer
• The house is in high demand
• You are confident in the value

If you do decide to waive an appraisal contingency and the house does not appraise for the purchase price, you may be responsible for making up the price difference in cash.

FAQs about appraisal contingencies

Is there an appraisal contingency deadline?

Yes. The appraisal contingency deadline is negotiated between the buyer and seller and is typically set a certain number of days after the contract is accepted, not after the appraisal is completed.

How long is an appraisal good for?

Appraisals are often valid for up to 120 days, but the exact timeframe depends on the loan type and lender requirements.

How much does an appraisal cost?

The cost of an appraisal ranges from a few hundred dollars to several hundred dollars, depending on the location, size, and complexity of the property.

Who pays for an appraisal?

Typically, the buyer is responsible for paying for the appraisal as part of their closing costs. However, in some cases, the seller may agree to pay for the appraisal. 

How long does an appraisal take?

While the appraisal visit can last an hour or two, the overall appraisal process can take anywhere from a few days to a few weeks. How long an appraisal takes depends on the size of the house and the appraiser’s workload.

What is an appraisal gap clause?

An appraisal gap clause is a provision in a real estate contract that addresses the difference between the appraised value of the house and the purchase price agreed upon by the buyer and seller.

What happens if the appraisal comes in low and there’s no appraisal contingency?

If the appraisal contingency is waived and the home appraises for less than the purchase price, the buyer typically must cover the difference in cash or risk losing their earnest money deposit if they walk away.

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