What is the purpose of an appraisal contingency?

The purpose of an appraisal contingency is to ensure that the property value meets or exceeds the purchase price. This is a critical component of real estate transactions because it provides a safeguard for the buyer; if the property is appraised at a value lower than the purchase price, the buyer can negotiate for a lower sale price or potentially back out of the transaction without penalties. The appraisal serves as an independent assessment, ensuring both parties are making a sound financial decision based on the property's actual market value. This contingency protects the buyer from overpaying for a property and allows for a fair negotiation process if discrepancies arise between the agreed price and the appraised value.