A cautionary Tale for Residential Real Estate Professionals: Appraisal Contingency May Not Mean What you Intend

(February 16, 2015) Since the economic downturn and real estate mortgage crisis of 2008-09, it has become common for buyers and their agents to include a provision in a purchase offer for residential property which makes the agreement contingent upon the property appraising for an amount equal or greater to the purchase price. We have now seen several of these provisions contested by parties to purchase agreements. In many cases, the result has frustrated the intentions of both buyer and seller. Of concern to real estate brokers and salespersons, in two recent circumstances, the underlying deal fell apart due to differing interpretations of the contingency.

In both cases, the accepted purchase agreement included a provision that the transaction was contingent upon the property appraising for an amount not less than the negotiated purchase price. In both cases, the properties appraised for less. Thereafter, the similarities ended: In the first scenario, the buyer agreed to pay the negotiated price even though it was above the appraisal. The seller then refused to close, claiming that the appraisal provision was a contingency which was intended to benefit both the buyer and the seller. In a second circumstance, although the seller agreed to reduce the purchase price to the appraised value, the buyer refused to close, claiming that once the property failed to appraise, it had the legal right to void the sale despite the seller’s willingness to take less. In each case, the disappointed party sought legal advice after the fact and was told that the provision was not sufficiently specific to protect their interests.

In our opinion, a provision making a transaction contingent upon a subsequent appraisal is insufficient to protect the interests of the parties, and increases the likelihood of a sale falling apart. To avoid this outcome, we believe the purchase agreement should specify the consequences if the property appraises for an amount below the negotiated purchase price. As examples, when representing a buyer, consider including a provision indicating that if the property appraises for less that the purchase price, the buyer has the option of cancelling the deal or proceeding to close at the agreed upon purchase price. If representing the seller, it may be appropriate to request a provision allowing the seller the option of accepting the appraised price before the buyer is allowed to cancel. There may be other options based on the unique circumstances of the transaction and the parties. However, based on our recent experiences, adequately addressing the consequences of a failure to appraise will avoid unintended consequences for the contracting parties. For brokers and salespersons, a carefully drafted provision may help avoid an uncomfortable discussion with a disappointed client, and could save the deal as well.

For more information or assistance in the preparation of purchase agreements which will achieve your desired outcomes and protect your interests, contact an attorney in the Rhoades McKee’s Real Estate Team.