Fun With the Appraisal Contingency

As I shake off dealing with a particularly insidious brand of liar, let’s talk the difference between opinions and facts and have some fun with the appraisal contingency as written in the Arizona Association of REALTORS Residential Resale Purchase Contract.

This one’s inspired by a recent post on Trulia Voices where a buyer wants to file a grievance against the listing agent. As we’re told, the home is listed at $288,000, sells at $280,000 and the appraisal came in at $250,000. Apparently this home had been under contract once before and fallen through and – here’s the alleged rub – the listing agent didn’t say why, leading the buyer to believe the home hadn’t appraised previously. This, our buyer decided, is grievance worthy presumably because an appraisal is a “material fact.”

Except … it’s not. By definition, an appraisal is an opinion of value of a property at a given moment in time. No more, no less. Ask three appraisers the value of a property in a vacuum, without a purchase contract to satisfy, and you’ll get four different answers. So let’s set aside the only conceivable thing the buyer could hold against the listing agent, that they didn’t say the home didn’t appraise previously because, legally, the listing agent doesn’t have to say a word because it’s not a material fact.

Moving on … the appraisal contingency in the AAR contract is pretty simple. If a home doesn’t appraise for the agreed upon price, the buyer has the option of canceling the contract or bringing in the difference in cash to satisfy the loan because the buyer’s loan value will be based on the lesser of sales price or appraised value. (Keep in mind, this only applies to financed purchases; cash sales skip this entire section of the contract.)

So, in this instance, the appraisal didn’t come in. The buyers do not elect to cancel and aren’t willing to bring in the $38,000 so they go for the most common option, though it’s not in the contract, negotiation. They say they’ll bring in an extra $8,000. The sellers, despite the appraisal, still think their home is worth more than the $258,000 and say no. Buyers cancel because they’re not going to bring all the money in and then vent that they lost their inspection money when they elected to cancel.

What has me curious is why this possibility came as a surprise to the buyers, or if it really did? When I’m writing a contract with a buyer, I go through this paragraph and make it clear that if the home doesn’t appraise there aren’t going to be complications. Maybe their agent didn’t. Maybe their agent did and they just weren’t listening. None of us know.

Here’s the key component to all this – if a home doesn’t appraise, the onus is on the buyer and not the seller. The seller is under no obligation whatsoever to adjust the negotiated sales price. They performed their end of the bargain, negotiated in good faith, and that’s it. Whether the lender agrees with that sales price and is willing to give the loan is the buyers’ problem – not the sellers.

At the end of the day, the buyer is the one that canceled the contract. Inspection money is part of the cost of doing business when you’re buying a home. You’re not required to get inspections, it’s just incredibly highly recommended. But they’re for the buyers’ benefit and are a buyers’ expense, plain and simple.

Maybe there’s an attorney out there who will disagree. But a grievance against the listing agent? I’m just not seeing it from where I sit.

Jonathan Dalton

Jonathan Dalton is a 40-plus-year resident of the Valley and has been helping folks buy and sell homes since 2004. He can be reached at 602-502-9693 or info at allphoenixrealestate.com.

3 Comments

  • Dean Ouellette 8 years ago

    Jonathan, this is really interesting. Let’s forget about the legal mumble jumble and talk about something else real quick.

    First let me state i had an appraisal done a few months ago, two appraisals, same house, same week, 20% off. So I know they are not a science and that just proves it.

    Now… Think about this if you were buying a house for yourself. You see a house on the market for 300k, you put in an offer for 280k, they accept. Your appraisal comes back at 250k. Now you find out another appraisal had already been done ant it was right around 250k. I know there is nothing you can do, but wouldnt you be upset because you just wasted $350 for an inspection and $400 for an appraisal?

    Now I know there is nothing we can do at this time, because it is not a fact, but isnt it a fact that it did not appraise before? Again I dont think there is anything we can do in this situation, but I think there should be some way to protect a buyer in this situation. This is not a subject I have really ever thought about much, but is interesting to think about.

    Once again another great thought provoking post from one of the most under appreciated bloggers out there.

  • Jonathan Dalton 8 years ago

    It’s a fact it didn’t appraise but is that a material fact about the property or a fact about somebody’s opinion? An appraisal value isn’t a fact, it’s an opinion and a widely varying one as you point out.

    Now here’s my question back … shouldn’t the buyer have had some inkling that the house might not appraise? The comps were there; whether others were chosen is another story and it doesn’t seem as if the buyer’s arguing with the appraisal (which I’ve seen done) … as much as appraisals vary they (usually) don’t come completely out of the blue.

    My hunch is the buyer was expecting the seller to automatically drop the price because that’s what they were told would happen. And contractually, that doesn’t have to happen at all.

    (And thanks for the compliment, Boss)

  • BawldGuy 8 years ago

    Dean — Wondering if the seller would be upset for his agent disclosing info like a previous appraisal? It could be construed as roughly equal to an agent disclosing to buyer how much seller is willing to take.

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