Understanding the Appraisal Contingency

When working with a Buyer, it is important to be aware of the Appraisal Contingency Addendum to the FAR/BAR Contract (Addendum F) as this addendum could offer much added protection for your financed or cash buyer.

You may think that this extra addendum is not necessary as the sales contract already includes a specific appraisal contingency.  However, that is sometimes not the case.  While there is an appraisal contingency in the financing section of the FAR/BAR contract, it only applies if there is an “appraisal of the Property obtained by Buyer’s lender” that is “insufficient to meet the terms of the loan commitment.”

There are situations where this language would not protect a financed Buyer.  For example, if a lender is financing a fixed percentage of the value of the property (such as 95%) and the appraised value comes in less than the agreed upon purchase price, then the amount of a Buyer’s mortgage may be smaller than anticipated requiring the Buyer to come up with a larger down payment.  Another example might be where the borrower’s loan is relatively small, say only 50% of the purchase price.  If the appraisal comes in low the “small” loan (in comparison to the purchase price), will likely still fall below the benchmark 80% LTV of most banks.  While the loan is approved, the buyer might be overpaying for the property that doesn’t appraise for the purchase price.  The Appraisal Contingency Addendum could be used to avoid such situations.

The Appraisal Contingency Addendum allows the Buyer to make the contract contingent upon a specific appraisal value as selected by the Buyer (if left blank, the purchase price).  If the appraisal does not meet the threshold included in the Addendum, the Buyer would have the option to deliver a copy of the appraisal along with a termination to the Seller or the Buyer would have the option to then waive the appraisal contingency and complete the purchase.

The Appraisal Contingency Addendum can also be useful with a cash buyer who wants to ensure that the home will appraise for the amount that is being offered.  If you have any questions about the foregoing or need assistance with an addendum, please contact your local real estate attorney.

Sincerely,

Berlin Patten Ebling, PLLC

This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.

All rights reserved. This copyrighted material may not be re-published without permission. Links are encouraged.

www.berlinpatten.com 

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