Appraisal Contingency

TLDR: An appraisal contingency is the safety net that allows buyers to walk away from the transaction if a property does not appraise for the amount that they’ve agreed to pay for it. 

Appraisals, conducted by appraisers, are a professional evaluation of a property. They also function as a bank’s way of confirming that the house the buyer is purchasing (that they’re lending on) is worth what they’ve offered to pay for it.

Appraisers take a look at the house and what comparable homes in the area have sold for, and estimate what the house is worth. Appraisals are ordered by the lender and provide a neutral assessment of the value. They make sure that the buyer isn’t asking the bank to lend on a home that they’ve agreed to purchase for $300,000 when it’s only worth $100,000. The house is, after all, the collateral for the loan, and if it’s worth less than the amount that you paid for it, the bank risks losing a lot of money if the buyer stops paying the mortgage.

Example: An Appraisal

Here’s an example of an appraisal, which compares recently sold properties (“comparables”, commonly referred to as “comps”) to determine the value of the subject property.

What happens after the appraisal?

The answer to this question depends on whether you’ve included an Appraisal Contingency in the contract–you have a lot more options when you include the contingency. Let’s look at the potential scenarios.