After a morning of pacing and second-guessing my offer, I got the call from my real estate agent: they were countering my offer with an “appraisal gap” contingency! An appraisal contingency is common in most offers, and mine included one. Like an inspection contingency, an appraisal contingency allows the buyer to renegotiate the price of the home if the appraisal comes in below offer price. However, there’s one key difference: waiving the appraisal contingency entirely could cost you tens of thousands of dollars before you even close on the house.
In layman’s terms, the appraisal is something your bank orders to ensure the mortgage loan is worth the value of the house. If the appraisal comes in below your offer price, the bank will typically only provide a loan up to the appraisal amount. For example, if you offer $300,000, but the appraisal comes in at $250,000, you’ll need to make up the difference of $50,000 in cash – unless you have a contingency that would allow the buyer and seller to come to terms, usually by lowering the purchase price.
Most people, myself included, don’t have the option to waive the appraisal contingency simply because the amount of additional cash needed could be a huge hurdle. Which brings us back to the seller’s counteroffer: they wanted to add a clause to our appraisal contingency that stated we would make up the difference between appraisal and offer price up to $6,000. Effectively, this meant that if the appraisal came in up to $6,000 under my offer, I would have to make up the difference and pay the seller up to $6,000 in cash.