Definition
This contract protection says if the appraisal comes in too low, you can ask the seller to reduce the price, you can pay the gap, or you can cancel without penalty. It protects you from overpaying.
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Lenders require property appraisals to ensure the property value supports the loan amount. If the appraisal comes in lower than the purchase price, the buyer may not be able to finance the difference. The appraisal contingency gives the buyer options in this scenario, protecting them from paying more than the property is worth. Sellers often push to remove or limit this contingency in strong markets.
Pro Tip
Don't waive the appraisal contingency if you're financing—it protects you from overpaying.
Example
The appraisal contingency stipulated that if the property appraised below $425,000, the buyer could request a price reduction or terminate the contract.