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GlossaryClosingValuation

Appraisal contingency

2 min read
Short answer
An appraisal contingency protects a buyer when the lender's appraisal comes in below the agreed price. Because the lender lends against appraised value rather than contract price, a low appraisal creates a cash gap. The contingency lets the buyer renegotiate or withdraw instead of covering that gap, and waiving it means agreeing to pay the difference.

An appraisal contingency protects a buyer against the lender's valuation coming in below the price agreed with the seller.

It is necessary because of a structural feature of mortgage lending: the lender lends against appraised value, not against what the buyer agreed to pay.

The gap#

A property under contract at a given price, appraising below it, produces a shortfall. The lender will finance its percentage of the appraised value, and the difference between that and the contract price has to come from the buyer in cash — on top of the down payment already planned for.

That is the risk the contingency covers.

Why low appraisals happen#

Usually not because an appraiser got it wrong.

Residential appraisal rests on recent comparable sales, which means it reports what similar properties closed at over preceding months. In a rising market that data lags, and the more sharply prices are moving the further behind it sits.

An offer reflects today's competition. An appraisal reflects the last few months of closings. In a fast market those are different numbers, and the appraisal is not the one that is wrong — it is the one that is older.

The four outcomes#

Cover the gap with additional cash.

Renegotiate the price down, in whole or in part. Sellers agree more often than buyers expect, because the next buyer will likely face the same appraisal.

Challenge the appraisal with specific comparable sales the appraiser did not use, and an explanation of why they are better. This works occasionally and only on evidence.

Withdraw, if the contingency permits.

Without the contingency, only the first three exist, and the first is compulsory rather than optional.

Partial waivers#

A middle position exists and is often the better trade in a competitive situation.

Rather than waiving the contingency entirely, a buyer can agree to cover a shortfall up to a stated amount — committing to bring, say, a defined sum in cash while retaining the right to withdraw if the gap exceeds it.

That makes an offer materially stronger while capping the exposure at a number the buyer has actually decided they can absorb.

Where it interacts with distress#

In areas where foreclosures and forced sales make up a meaningful share of recent transactions, those sales enter the comparable set and pull appraised values down.

The consequence is that a buyer paying a fair market price in a neighbourhood with a cluster of distressed sales can face a low appraisal caused by other people's difficulties rather than by anything about the property.

An appraisal contingency is the protection against that, and in such neighbourhoods it is worth more than it looks.

Common questions

What happens if the appraisal is low?
The lender caps the loan at the appraised value, so the buyer must cover the difference in cash, renegotiate the price, challenge the appraisal with better comparables, or withdraw. Which options exist depends on whether an appraisal contingency is in the contract.
Can I waive appraisal but keep financing?
Yes, and it is a common competitive structure — but understand what it means. Waiving appraisal while keeping financing means agreeing to bring the shortfall in cash, so it only works if that cash exists.
How often do appraisals come in low?
More often in rapidly rising markets, because appraisals rest on recent closed sales and therefore lag current prices. It is not usually an error; it is the method reporting slightly older data than the offer reflects.
Keep reading
Appraisal
An independent professional opinion of a property's market value, required by lenders to confirm the collateral supports the loan amount.
Contingency
A condition in a purchase agreement that must be satisfied or waived, giving the buyer a defined right to withdraw before a stated deadline.
Comparable sales
Recent sales of similar nearby properties, adjusted for differences, used to estimate what a subject property is worth.