If a Home Doesn’t Appraise, Can a Buyer Cancel the Contract?

If a Home Doesn’t Appraise, Can a Buyer Cancel the Contract?

There’s a well-known saying in real estate: “A home is only worth what a buyer is willing to pay.” But when a buyer is obtaining a mortgage, a home may only be worth what a lender is willing to lend. That’s where a home appraisal comes in—conducted by a licensed appraiser, it determines the property’s value from the lender’s perspective.

But what happens if the appraisal comes in below the contracted price? Can a buyer cancel the contract? Is the buyer locked in regardless? Does the seller have to reduce the price? Let’s explore the outcomes when a home doesn’t appraise.

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Understanding Contract Contingencies

Whether a buyer can cancel a contract due to a low appraisal depends largely on contract contingencies. The most common contingencies include:

• Finance Contingency: Protects the buyer if they cannot secure financing

• Appraisal Contingency: Protects the buyer if the home doesn’t appraise at or above the purchase price

Some buyers may waive these contingencies in competitive markets. Without contingencies, buyers are generally responsible for covering any appraisal shortfall or risk breach of contract.

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Finance Contingency

A finance contingency allows buyers a specific period to obtain a mortgage. Lenders require an appraisal as part of mortgage approval.

• Scenario 1: The home doesn’t appraise, but the buyer can still secure financing. In this case, they cannot cancel the contract and must cover the shortfall.

• Scenario 2: The buyer cannot obtain financing due to a low appraisal. Here, they can usually cancel the contract without penalty.

The key is that a finance contingency only protects the buyer if the financing fails—appraisal results alone don’t automatically cancel the contract.

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Appraisal Contingency

An appraisal contingency specifically addresses low appraisals. It allows buyers to cancel the contract if the home doesn’t appraise for the agreed-upon amount within the contingency period.

This is the only contingency that guarantees a buyer can back out if the appraisal comes in low, provided they act within the specified timeframe.

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No Contingencies

In hot markets, buyers often waive finance or appraisal contingencies to make their offers more competitive.

• Without contingencies, buyers cannot cancel if the home doesn’t appraise.

• They must cover the appraisal shortfall or risk being in breach of contract.

• Consequences can include losing the escrow deposit or being sued for performance.

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Possible Outcomes When a Home Doesn’t Appraise

If a buyer has an appraisal contingency and the property comes in low, there are four main outcomes:

1. Seller Price Reduction:
   The seller may reduce the price to match the appraised value, especially in a buyer’s market. In competitive markets, sellers may resist lowering the price.

2. Buyer Pays the Difference:
   If the seller won’t reduce the price, buyers can choose to cover the appraisal gap themselves. This is common for buyers who really want the property.

3. Meeting in the Middle:
   Buyers and sellers may negotiate a partial shortfall split. For example, if the appraisal is $30,000 lower, the seller might reduce the price by $14,000, and the buyer covers the remaining $16,000.

4. Cancel the Contract:
   If no agreement is reached within the appraisal contingency period, the buyer can cancel the contract. While this is often undesirable after paying for inspections and appraisals, it may be the only viable option.

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What Happens if the Home Appraisal Is “Wrong”?

Appraisals are more art than science. Appraisers choose comparable sales and make subjective adjustments for features like pools, renovations, or lot size. Multiple appraisers might produce different values for the same property.

If a home appraises below the contract price but strong comparables exist, buyers have two additional options:

1. Contest the Appraisal:
   Buyers can challenge the appraisal, though success is not guaranteed.

2. Order a Second Appraisal:
   Some lenders allow a second appraisal. FHA appraisals may limit this option, and switching lenders can cause delays.

Technically, this brings the total outcomes to six possible options when a home doesn’t appraise.

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Final Thoughts

Buyers and agents should never assume they understand appraisal outcomes without reviewing contract details.

• A finance contingency alone does not protect against a low appraisal if the buyer can still secure financing.

• An appraisal contingency is essential for buyers who want an exit strategy in case of low appraisals.

• Buyers need to know their financial capabilities and the risks of including or waiving contingencies before making an offer.

 

Understanding contingencies, appraisal outcomes, and contract terms is critical to navigating the real estate process confidently and avoiding unexpected financial obligations.