What Is the Appraisal Contingency and How Does It Protect San Diego Buyers?

What Is the Appraisal Contingency?

The appraisal contingency is a clause in your California purchase agreement that protects you if the property appraises below your agreed purchase price. If the appraised value comes in lower than the price you agreed to pay, the appraisal contingency gives you the right to cancel the contract and receive a full refund of your earnest money deposit.

Why Appraisals Sometimes Come In Low in San Diego

In rapidly appreciating San Diego markets, the most recent closed sales comps that appraisers use may lag behind current market conditions by 30 to 60 days. This means an appraiser may use sales from a slightly lower market level to value your purchase — resulting in an appraised value below your agreed price. This is particularly common in competitive markets where buyers are paying above asking price.

What Happens When the Appraisal Comes In Low

• With appraisal contingency: You can cancel and get your deposit back, negotiate the price down to the appraised value, split the gap with the seller, or voluntarily cover the gap in cash
• Without appraisal contingency: You are obligated to proceed at the agreed price or lose your earnest money — you must cover any gap between appraised value and purchase price entirely from your own funds

Appraisal Gap Coverage Clauses

A common middle ground in San Diego's competitive market is an appraisal gap coverage clause — where the buyer agrees to pay up to a specified amount above the appraised value while retaining the right to cancel if the gap exceeds that amount. For example: 'Buyer agrees to cover up to $25,000 above appraised value.' This signals strength to sellers while maintaining some protection.

Should You Waive the Appraisal Contingency?

Waiving the appraisal contingency is appropriate only if you have sufficient cash reserves to cover a potential gap between the appraised value and your purchase price. Before waiving, calculate the worst-case scenario: if the home appraises at 95 percent of your purchase price, can you cover the difference without jeopardizing your financial stability? Rieder Homes Group helps buyers make this calculation before every offer.

Related Reading on RiederHomes.com:

→ Blog #89: Contingencies Explained

→ Blog #86: Making an Offer

→ Blog #91: Loan Contingency

→ Blog #88: Multiple Offer Strategy

— Mance Rieder, Broker Associate | Rieder Homes Group | REAL Broker | riederhomes.com | 858-295-0556