Should You Write An Appraisal Clause In The Contract?

Written by Posted On Thursday, 03 March 2005 16:00

Agents in a Florida office have a bet going -- should you write an appraisal clause into the contract or is it understood that if the deal falls out due to failure to appraise, that the buyer will get the escrow money back?

"We are split in my office," says Florida Realtor Wendy Jensen. "On our standard association contract (FAR), there is not an appraisal clause. Can you give us advice? We put in an offer of 262K on a home where the comparables are about 235 as I see them. My buyer wants the home to appraise, the seller will not budge if does not. Could we lose our 10K escrow deposit on this standard far/bar contract since we did not write an addendum stating that this sale is contingent to appraising out? Half of us say yes, the other half, no. I thought the standard contracts were good and wouldn't allow escrow funds to be lost over a house that clearly did not appraise.

"My buyer is putting down 10 percent and has the financing contingency," Jensen continues. "He has a firm pre-qual letter that states he qualifies for a loan not to exceed the 90 percent. Seems pretty clear to me but we need an expert!"

Jensen got an expert -- attorney Hank Sorenson .

"It never hurts to expressly address in a contract, an item such as a short appraisal," offers Sorenson. "However, the danger is getting too specific and leaving out any other term of the loan approval that may cause the loan to fall through."

"Since there are no limit to terms in a loan approval that may not be satisfied, I would definitely recommend going with a "catch-all" contingency phrase, that cancellation is permitted for non-satisfaction of any term in the loan approval. If, in the contract, you had an express provision dealing with a short appraisal in addition to the catch-all phrase, it would be superfluous (but appreciated by the buyer nonetheless)."

That put the office bet to rest.

"We were both right and wrong," says Jenson. "Good news is -- Hank says my buyers are safe if the home does not appraise, it's in the financing contingency of the contract. Also, no decent agent would try to keep their escrow funds over the home not appraising. My broker, who felt I should have an appraisal clause written in to be safe, is also right, and in the future we will use the standard FAR contract as it specifically states, the home must appraise while the FAR/BAR says absolutely nothing regarding appraisal, so a cash buyer who wanted an appraisal could end up having to pay too much or lose the escrow deposit."

Explains Sorenson, "The FAR contract addresses the issue of a short appraisal expressly by stating that the financing contingency is not satisfied if the appraisal is short. However, under the FAR/BAR contract (approved by FAR and the Florida Bar), the financing contingency simply states that the buyer can walk if any term of the loan approval is not met prior to closing (a short appraisal is not expressly addressed in the financing contingency). However, since every loan approval that I have ever seen has a sufficient appraisal as a term of the approval itself, the buyer can still walk away from the FAR/BAR contract if the appraisal is short because a term of the loan approval hasn't been satisfied (it just requires that extra step of analysis to be done since the contract doesn't expressly address the issue)."

He notes that agents should be aware that a contract can be canceled on a basis that is not expressly mentioned in the sales contract, as this example illustrates.

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