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 derail the entire transaction.
The sale can't move forward until the appraisal is complete and the lender signs off.
Let's face it—if a buyer offered $500,000 for your home, but 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.
Important note: 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
Your Realtor should take an active role in educating the appraiser and directing them to recent comparable sales. They should also highlight upgrades done on the property to provide context to the buyer's appraiser. This may help persuade the appraiser's opinion.
Use a Trusted Local Lender (Buyers Do This)
Local lenders typically engage appraisers familiar with your area, which reduces the risk of inaccurate valuations.
Document Improvements
Keep records of:
- Dates and costs of improvements
- Permits obtained
- Warranties (roof, HVAC, kitchen/bath, basement, windows)
Prepare the Home
- Clean and tidy every space
- Fix small items
- Enhance curb appeal
- Remember: first impressions matter
If Appraisal Comes in Low
- Request the report (and corrections if there are errors)
- Submit better comps
- Ask for a second appraisal if allowed by the lender
What Happens If the Bank Appraisal Comes in Less Than the Offer?
If your home appraises for less than the contract price, you have four options:
Option 1: Buyer Brings Extra Cash
The buyer covers the shortfall out of pocket to keep the deal at the original price.
Option 2: Seller Reduces Price
You agree to lower your price to the appraised value.
Option 3: Split the Difference
Both sides renegotiate and meet somewhere in the middle.
Option 4: Cancel the Contract
If allowed by the appraisal contingency, either party can walk away.
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 |
Key takeaway: An appraisal gap clause protects you (the seller) by ensuring the buyer will contribute additional cash if the appraisal is low. An appraisal cap clause protects the buyer by limiting how much they'll pay regardless of the contract price.
How to Help Your Home Appraise Well
Create a one-page improvements sheet with dates, brands, costs, and permits for all major upgrades.
Provide access to all spaces including garage, attic, and mechanicals. Have receipts handy.
Flag location benefits that comps may miss:
- Cul-de-sac location
- Trail access
- Premium lot
- End unit (for condos/townhomes)
- Proximity to amenities
Time-box showings so the appraiser can work without interruption.
The 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 net you the most.
