Quick takeaways
- An appraisal estimates value for the lender; an inspection assesses condition for you. They're not the same thing, even though both involve someone walking through the house.
- A low appraisal doesn't cancel your purchase by itself — what happens next depends on your contract and your appraisal contingency.
- Appraisers lean heavily on recent comparable sales ("comps") nearby, which is why local market conditions matter so much.
What an appraisal is actually for
Think of it this way: your lender isn't just lending money to you, they're lending against the house. An appraisal is the lender's way of confirming the house is actually worth roughly what everyone agreed to pay for it. It's ordered by the lender, and it's for the lender's protection first — though the result affects you directly too.
Appraisal vs. inspection — not the same thing
This mix-up trips up a lot of first-time buyers, so let's clear it up here. An appraisal estimates value. An inspection assesses condition. An appraiser might walk through relatively quickly and take some photos and measurements; they're generally not crawling into the attic looking for a cracked pipe the way an inspector would. Wanting to know if the roof leaks? That's an inspection question. Wanting to know if the price is reasonable for the market? That's the appraisal's job.
How an appraiser generally arrives at a number
- Comparable sales ("comps") — recently sold, similar homes nearby are usually the biggest factor.
- Condition and features — square footage, bedrooms/bathrooms, lot size, updates, and general condition.
- Location factors — school zones, neighborhood trends, and general market conditions in the area.
Because comps drive so much of this, appraisals can lag behind a fast-moving market a little — in a market where prices are rising quickly, recent comps may not have "caught up" yet.
What a low appraisal generally means
Here's the part that surprises a lot of people: a low appraisal doesn't automatically kill the deal. What it does is create a gap between the price you agreed to and the amount the lender is willing to base your loan on. Generally, buyers, sellers, and agents then have a few common paths to consider:
- The buyer pays the difference between the appraised value and the purchase price in cash
- The seller agrees to lower the price to match the appraisal
- Buyer and seller split the difference
- The buyer disputes the appraisal or requests a second opinion, where the lender allows it
- If none of those work out, the buyer may be able to exit the contract — if an appraisal contingency is in place
The appraisal contingency, in plain terms
An appraisal contingency is a clause in your purchase contract that generally protects you if the home appraises for less than the agreed price. Without one, you could be on the hook to make up the difference in cash or risk losing your earnest money if you walk away. Whether to include one, and how it's worded, is exactly the kind of thing worth discussing with your agent or a real estate attorney before you sign an offer — especially in a competitive market where some buyers waive it to strengthen their offer.
A reasonable way to think about it
An appraisal contingency is a bit like a safety net. You hope you never need it, but knowing whether you have one — and what it actually says — is worth five minutes of your time before you're in the middle of a stressful negotiation.
What this guide is not
This is a general explanation of how appraisals typically work. It doesn't estimate any specific property's value or predict how an appraisal will turn out. A licensed lender or agent can walk you through what's happening with your specific appraisal.