A signed contract does not end a home sale. If the property appraises below the agreed price, the financing changes and the deal often has to be renegotiated.
The appraisal serves the lender
A mortgage is secured by the property. If the borrower stops paying, the lender's recovery depends on what the house is worth, not on what the buyer agreed to pay.
The appraisal is therefore an independent estimate commissioned for the lender's protection, even though the buyer usually pays for it.
This is why an appraiser is not asked whether the price is reasonable. They are asked what the property is worth, as a separate question from the negotiation.
Lending is sized against value, not price
Loan amounts are set as a proportion of value. When the appraisal comes in below the contract price, the lender applies that proportion to the lower figure.
The buyer's required cash contribution then rises by the entire shortfall, because the gap must be filled from somewhere and the lender will not fill it.
A buyer who budgeted a specific down payment can find the requirement has increased substantially with no change in the house or the terms they agreed.
Comparable sales look backwards
Appraisals rely heavily on recent sales of similar nearby properties, adjusted for differences in size, condition, and features.
Because closed sales reflect contracts signed weeks or months earlier, the method lags a rapidly moving market in both directions.
In fast-rising neighborhoods this produces appraisals below current asking prices, not because appraisers disagree with the market but because their evidence is older than it is.
Unusual properties are harder to value
The comparison method works best where properties are similar to one another, which describes much of American suburban housing and little else.
A custom home, a rural parcel, or a property with an unusual feature has fewer genuine comparables, so adjustments carry more of the weight and uncertainty rises.
Sellers of distinctive properties often experience this as an appraiser failing to recognize value, when the underlying problem is a thin evidence base.
The options after a gap are limited
Buyer and seller can split the difference, the seller can lower the price, the buyer can add cash, or the contract can be terminated if a contingency permits it.
An appeal is sometimes possible where the report contains factual errors or omitted a relevant sale, though a difference of opinion alone rarely succeeds.
Contract terms determine which of these are available, which is why the appraisal contingency language matters far more than it appears to at signing.