What Is an Appraisal and Why Does It Matter?

What Is an Appraisal and Why Does It Matter?

Just because your home is under contract doesn’t mean it’s time to celebrate yet. One of the most important steps still ahead is the home appraisal—and the results can either move your sale smoothly toward closing or sidetrack the entire transaction. The sale can’t move forward until the appraisal is complete and the lender signs off.

Let’s face it – if buyer offered $500,000 for your home, but if that home is really only worth $450,000, the bank has a lot to lose if the buyer defaults on their mortgage payments. Banks want to make sure that the money they lend is protected and appraisals are one of the ways they do that.

How an Appraisal Works

• What is an appraisal? An appraisal is a professional, unbiased opinion of value that lenders use to decide how much they’re willing to lend. Appraisers are mandated to use very recent comparables – usually properties that have sold in the last 60 days. Appraisers do not judge a home’s value based on what happened before that, nor do they make predictions of what can happen. 
• Who pays for an appraisal? The lender orders it; the buyer usually pays for it. Sometimes the lender picks up the cost of appraisal.
• Appraisal vs. inspection: Appraisers determine value; inspectors evaluate condition and safety. Different purposes, different reports.
• Why it matters: It protects the lender from over-lending and confirms the property exists, is habitable, and supports the loan amount. No appraisal is required for all-cash purchases. The goal of a bank appraisal is to justify how much a Buyer has agreed to pay for a home, not determine the true value of a home. Appraisals will never come in over the agreed-to price. If you got a deal, don’t expect the bank appraisal to come in higher than what you offered.
• How it works: The appraiser tours the home, reviews recent comparable sales, and adjusts for differences (size, condition, upgrades, lot, view, location trends). For condos, sales in the same building carry the most weight.

How to Protect Yourself from Low Bank Appraisals?

• Make sure your Realtor takes an active role in educating the appraiser and directing him/her to recent comparable sales and highlight upgrades done on the property to provide context to the buyer’s appraiser. They may be able to help persuade the appraiser’s opinion.
• Use a trusted local lender (buyers do this) who typically engages appraisers familiar with your area.
• Document improvements: dates, costs, permits, warranties (roof, HVAC, kitchen/bath, basement, windows).
• Prepare the home: clean, tidy, fix small items, enhance curb appeal—first impressions matter.
• If low, request the report (and corrections), submit better comps, or ask for a second appraisal if allowed.

What happens if the bank appraisal comes in less than the offer?

• Buyer brings extra cash to cover the shortfall.
• Seller reduces price to the appraised value.
• Both sides renegotiate and split the difference.
• Cancel if allowed by the appraisal contingency.

Appraisal Gap vs. Appraisal Cap: What Sellers Need to Know

In competitive markets, buyers may include clauses addressing low appraisals. Two common ones are the appraisal gap and the appraisal cap—and they affect your bottom line differently.

Definitions

• Appraisal Gap Clause: Buyer promises to contribute a fixed amount above the appraised value to keep the deal alive (helps sellers).
• Appraisal Cap: Buyer limits the maximum they will pay when appraisal is low (protects buyers).

Side-by-Side Scenarios for an Offer Price of $500,000:-

Clause	Scenario	Buyer Pays	Impact on Seller
Appraisal Gap (10k)	Appraisal = $475,000 (gap covers $10k)	$485,000	Seller must renegotiate or risk losing the deal.
Appraisal Gap (10k)	Appraisal = $485,000 (gap covers full $10k)	$495,000	Close to contract price, but not full $500k.
Appraisal Cap	Appraisal = $475,000, Cap = $480,000	$480,000	Seller likely reduces price or renegotiates.
Appraisal Cap	Appraisal = $485,000, Cap = $480,000	$480,000 (cap limit)	Buyer capped; seller decides to renegotiate or exit.

How to Help Your Home Appraise Well

• Create a one-page improvements sheet (dates, brands, costs, permits).
• Provide access to all spaces (garage, attic, mechanicals) and have receipts handy.
• Flag location benefits the comps may miss (cul-de-sac, trail access, premium lot, end unit).
• Time-box showings so the appraiser can work without interruption.

Bottom Line

An appraisal can make or break your sale. Understanding how it’s calculated—and how clauses like appraisal gaps and caps play out—helps you avoid last-minute surprises and choose the offer most likely to close on time and at the strongest net.