Ask the Broker – Appraisal is low, buyer flees. Is there a consolation prize?

This from an email I received this week: 

My agent represents the buyer and seller. I have a contract to sell my home that is contingent on the financing from the buyer bank at 80% of the appraised value of the home. Then they submitted an addendum early into the 30 day contract. Our agent said they did a desk top appraisal and decided a new purchase price (lower of course). I agreed. They took a long time to submit the earnest money though the contract stated it would be submitted in 3 days. They sent two inspectors and all turned out good. Then a few days before closing the buyer sent out and appraiser. That appraisal come out lower than the adjusted desk top appraisal offer. They say they couldn’t get funded and therefore canceled the contract. Our agent pointed out that the properties used in the appraisal were 5 – 8 miles from my home and inferior to my home. She believe the appraisal was suspiciously low. We ask for a second appraisal and agreed to pay for it. The buyer refused. They still canceled and now want the earnest money back. We were not informed of the final appraisal results until day 40 of the 30 day contract. Am I entitle to the earnest money? We did ask in writing for contingencies to be removed before the 30days, but that did not happen.

First, let me begin by reciting the Ask the Broker mantra. I am not an attorney, not an attorney, not an attorney.

Now that that is out of the way, I will cut right to the chase. The questions we receive change, but the underlying issue is somehow always the same. Who gets to keep the earnest money deposit?

I spoke about contingencies, methods of contingency removal and what constitutes breach here.  In short, if you are using the standard California Association of Realtors Purchase Agreement, the default method by which buyer contingencies are removed is the Active Method. This means that, even if your buyer was supposed to remove their contingencies on some particular day (typically day 17, or in your case day 30), absent having done so in writing, their contingencies remain in effect. Further, if they now wish to cancel the agreement, they are likely entitled to have their deposit returned to them. Only in the event of a breach (contingencies have been waived and then the buyer fails to perform) would you as the seller have a claim against their deposit.

At any time within 48 hours of the contingency removal deadline (again, the contract default language), you could have issued a Notice to Perform. If the buyer at this point failed to remove their contingencies by the deadline, your remedy would have been to cancel contract and return the deposit. Either way, without that contingency removal, you shouldn’t plan on cashing their check.

Now, back to the appraisal fun and games. Desktop appraisals were much more common in the crazy days of a rapidly appreciating market. Today, we still encounter a few from time to time. Whether the appraisal is of “desktop” variety (the appraiser looks at the comparable statistics online and perhaps does a drive-by of the home but does not personally inspect it) or is the more traditional go-look-measure-take pictures appraisal, we am personally seeing more appraisal reviews being required by the lenders. These appraisal reviews, unfortunately, tend to come at the eleventh hour.

It is not difficult to understand why an appraisal review might make sense to a lender. Today, there are a lot of financial institutions sitting on a lot of delinquent loans and bank-owned property. Questionable lending practices over the past several years coupled with declining prices have resulted in the lenders getting burned. Whether their pain was self-inflicted or earned is not the point. The point is that appraisals are good only on the day they are written, and the lenders are being more cautious about protecting their investment.

Continuing to work backwards, appraisals can be appealed and second opinions can be authorized (by the lender). I suspect (and it is just a hunch here) that your buyer, faced first with an appraisal below contract price and then, weeks later, with a second appraisal lower yet, might have had a case of the old buyer’s remorse. The prevailing buyer attitude right now is one of trepidation, that the market will continue to decline (“Did I pay too much?).

If there is a lesson here, it is this – Get those contingencies removed on time! A contingency removal will not assure a successful close of escrow, but it might result in a small consolation prize. Otherwise, you may end up with nothing but your home back on the market.

As always, you should contact a real estate attorney.

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