What does the term "appraisal contingency" refer to in a real estate contract?

The term "appraisal contingency" refers to a clause in a real estate contract that allows the buyer to back out of the sale if the appraisal comes in lower than the agreed-upon purchase price. This is important because it protects the buyer from overpaying for the property, ensuring that they are not financially obligated to proceed with the purchase if the market value, as determined by the appraisal, does not meet their expectations or the purchase price.

If the appraisal indicates a value lower than the price the buyer is willing to pay, the buyer can negotiate with the seller to either lower the price or cover the difference, or simply choose to withdraw from the contract without penalty. This clause is particularly crucial in competitive markets where bids may exceed fair market value; it safeguards the buyer's investment by ensuring they are not overcommitted financially based on an inflated agreement.