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It’s something many of us have seen before.
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26 Comments on What If It Doesn’t Appraise But the Buyer Can Still Get the Loan?
I agree with "Buyers Broker of Florida". Shame on the attorney who did not protect their client. Without an appraisal contingency I think they buyer is screwed!
Hi Mike - Clearly it is an issue for the lawyers to deal with.
Mike,
You just dont know what lawyers are thinking either
Good luck on your deals
HI Mike,
I had this happen last year to a much smaller extent. My listing 1 bedroom at $675K. It went into contract at $650K. Downtown appraiser didn't know Upper West Side used a comp from a FSBO who sold for $595K in craigslist. Buyer had a good buyer agent. Appraisal came in at $618K or something. Very qualified buyer (coop) put down $300K. It didn't affect the Loan amount just the LTV slightly. Buyer's agent and buyer never said a word, still got loan and closed. I just ran into buyer even though he's not my client, I sell in the building he is so happy in the apartment. The same unit 2 floors up just just came on the market for $769,000. My sale closed in 2010.
In your deal as sellers agent I would either get another appraisal. There is a way to dispute appraisals the lender has a special form but it's probably not necessary. Depending on the contract language I think the financing contingency was satisfied. I don't think LTV matters unless that was part of the terms. The lender is still giving the same loan amount. I think a low appraisal only matters when it affects he amount of the loan and it's not enough so the buyer has to come up with difference or they can walk. Did the the lender issue a loan commitment? If buyer got commitment I think it's clad.
If I were the listing agent I would review the appraisal and see if I could protest it.
As an Exclusive Buyer's Agent I would have done everything contractually to protect my client. Shame on the buyer's rep for not including an appraisal clause. It's these type of ocurrences (incompententency) that creates distrust of our profession. As I see it though I believe the seller is contractually obligated to purchase the property.
Read the contract. Basd on what you told us, the contract was contingent on the loan not the appraisial. Lets go to closing or forfeit the deposit.
Most lenders have a procedure for a Reconsideration of Value. In that process, a borrower can request that errors be corrected or that additional data be considered.
You might also want to consider having the original appraisal reviewed by an appraiser who is experienced in the local market. Unfortunately, some Appraisal Management Companies utilize the lowest cost appraisers instead of appraisers with substantial local experience.
Shame on the attorney for not properly protecting his client!
As far as another appraisal, "appraisal shopping" for value is a violation of the Home Valuation Code of Conduct (H.V.C.C.).
As far as keeping the $75,000, it will certainly go to court if the contract is nullified. The seller will probably not get the whole $75,000 (if any). It is highly probable they will only get a fraction of that amount. Judges seldom award the seller that much for a contract breach plus the contract surely does state a purchase price, loan amount, and required down payment. The buyer can not be forced to take a larger loan or deposit additional funds.
The seller should consider reducing the price and move forward or prepare to wait for another offer. The new offer may not be full price.
When both the buyer and seller dig in, sometimes meeting at an equal halfway point works. But I have found that buyers typically won't pay over appraised vanlue.
Donald and Kamal - Frankly, we don't see many contracts with appraisal contingencies here in NYC.
Marc - I think at this point, we'd like to keep the lawyers out. The brokers have a better shot at negotiating this deal (and myself and the buyer's broker happen to be attorneys).
To everyone suggesting that we dispute the appraisal, that's not going to work. The buyer can get the loan. He just wants to use the appraisal to renegotiate.
Mark - the seller would get all or nothing of the earnest money deposit. It's liquidated damages which means by definition that the seller need not prove or argue over actual damages. With regards to the dollar amount, it's actually small by NYC standards. Are contracts typically require a 10% earnest money deposit, but we agreed to take a smaller one as the purchaser was waiting on proceeds from the sale of another property at the time the deposit was made.
Mitchell - unfortunately, the buyer has not produced the loan commitment yet. They have another couple of weeks to do so pursuant to the mortgage contingency (and we have the right to extend that period for another 30 days). I could certainly see this coming down to an argument over whether the purchaser fulfilled their obligations to diligently pursue the commitment letter. In that case, our client will likely keep the deposit and the buyer will probably litigate to attempt to get it back. I believe they would lose as they have no basis for not obtaining the loan.
Agents should always protect their buyers by including both a financing and an appraisal contingency. Without an appraisal contingency, the value is not an issue so long as the buyer qualifies for financing. In GA, our financing contingencies state the LTV to be obtained.
Hi Mike and Kate,
Why don't you take a picture together?
Looks like you are divorced or something.
Good post
Phil
Phil - Hah! It may be time for some new photos in 2012.
Mike, it sounds like you have the legal right to keep the earnest money. But there is also the question beyond that. If the buyer walks and seller keeps the earnest deposit and now needs to relist the property, will you likely get a full price offer? What if you get closer to the appraised price with a second offer? So even though you have the legal right, it may make more sense to try to negotiate a price somewhere between contract price and appraised price. I often subscribe to one in the hand is more valuable than two in the bush.
Cal
This is not good. The buyers' representatives should have tied the contingency to the appraisal coming in at the purchase price. In California, there is an appraisal contingency, but if the loan contingency is met, the appraisal contingency goes with it. You have to "untie" them. This is important because in longer escrows, the banks may seek a second appraisal.
Mike and Kate - It sounds like per the terms of the contract, the sellers have the right to keep the earnest money.
I'm curious why there isn't usually an appraisal contingency in your contracts. Why would a buyer want to buy a home that couldn't appraise? Ours are standard.
We also have standard language for liquidated damages if the buyer walks after all contingencies are removed which limits damages to 3% of purchase price or the amount of the earnest money deposit, whichever is less. I think this is good protection for the buyer.
Do you feel that the appraisal was incorrect as to value?
Cal - At this point the seller does not wish to go down that road.
Aimee - I wouldn't disagree, but that's not what was done. There are positives and negatives about having attorneys on every deal. Personally, I prefer to have the ability to use custom riders that we can draft for every deal. Then again, if you attorney is not as good or experienced in NYC residential transaction, you may have been better off if you had a standard contact like many other states use.
Christine - similar to what I mentioned to Aimee, most attorneys have their own riders that they like to use for contracts of sale. They start with one of a handful of boiler plates that are common here. Provisions like mortgage contingencies often are unique to the lawyer or their firm. 10% earnest money deposits are the norm here. I do believe there is justification for our asking price and feel it was further justified by the fact that the purchaser had been looking at dozens of properties for six months and immediately felt they had found the best option out there.
If the buyer wanted the purchase to be contingent on the property appraising that must be stated in the purchase contract. If it's not, buyer will probably lose their deposit. In CA the maximum liquidated damages is 3% for owner-occupied 1-4 units. Otherwise it's actual damages, which may be tough to prove.
Our boilerplate purchase contract contains a separate appraisal contingency of cash deals.