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It Didn’t Appraise

by James L. Goldsmith
December 2020

Much of the Commonwealth is enjoying a seller’s market in residential real estate. As a consequence, more offers exceed list price. As a further consequence, we see more transactions failing due to properties not appraising at or above sale price.

What happens when a lender issues a statement of credit denial and termination?  The answer can be found in the Agreement of Sale that states that the Agreement is contingent upon the buyer obtaining financing (paragraph 8) and that if the mortgage loan is not obtained for settlement, all deposit monies will be returned to buyer (paragraph 8(B)3).

A prudent listing agent should verify the denial by obtaining a copy of the notice of declamation. Maybe the denial was the result of buyer’s failing to make a full application or some other reason that would be a breach of the Agreement. But if it is the failure of the property to appraise, what can the agent do to keep her seller’s transaction alive? 

Keeping the transaction alive will likely involve a reduction in the sale price or some other financial concession by the seller. Thus, the first question should be whether the seller wants to continue with this buyer at a reduced sales price. Is it likely there is another buyer willing to pay a similar amount but needs to borrow less or nothing, or will another buyer bring the same problem? Further does the seller need a quick sale or does she have the luxury of time? And what is the impact of the property going from active to pending to active, and the relative market conditions in that particular community? 

If the seller wants to keep the current transaction alive, then it’s clear that the seller will have to make concessions. Even then, it is likely that the buyer will not be required to move forward. To keep the transaction alive, the buyer will have to have remain interested. If that is the case, and the parties are in accord, the Agreement can be modified to reflect the appraised value as the purchase price with the properly adjusted loan amount. Be sure to check with the lender to determine whether the revised purchase price and mortgage terms will be acceptable.

What if the buyer does not want to purchase the property even though the seller is willing to make concessions? Many buyers just don’t want to buy a property that didn’t appraise for the amount they first offered. For them, this may be a stigma they can’t ignore even if the seller will generously reduce the purchase price. Can a seller insist that the transaction go forward when the purchase price is reduced to the appraised price?  Many sellers and agents tend to think so.

To those who believe a seller’s reduction in sales price keeps the deal alive, I ask where in the Agreement does it so provide?  What I see is (1) the Agreement is contingent upon financing (and it didn’t happen); and (2) that if the loan is not obtained, the transaction is terminated and the buyer gets the deposit money. So why then, does the buyer have to agree to different terms if the seller offers?  An answer frequently given is that the mortgage contingency clause in paragraph 8(D) gives “Seller the right … to contribute financially … to Buyer … to make the above mortgage terms available to Buyer.”  The “above mortgage terms” are found in the boxes provided at the beginning of the Mortgage Contingency Clause and they include loan amount, minimum term, type of mortgage, and so on.

Sellers reason that when they reduce the sale price to the appraised amount, they are contributing financially to the buyer to make the terms available. Yes, reducing the sale price might make a mortgage available to buyer, but that alone will not make all of the terms recited in the contingency available to buyer. The provision allowing sellers to make contributions is generally used and appropriate when the interest rate committed by the lender is higher than that recited in the term, or there was an origination fee that wasn’t contemplated.  Seller can easily make contributions that will reduce the interest rate or the amount of the origination fees to fall within the parameters recited in the Agreement. Not so here.

Sellers who are willing to reduce the purchase price are understandably upset when the buyer refuses to move forward.  They may complain about having taken the property off the market while doing everything possible to make the sale work.  This is a reason one needs to keep an eye on the commitment date and why a seller should consider terminating if a commitment has not timely issued.  Why keep the property off the market longer if there are qualified buyers in abundance!  Of course, it remains a possibility that the property won’t appraise for a subsequent buyer.

Finally, when a buyer walks because their mortgage did not come through, does the buyer have to submit a Notice of Termination?  No, it is sufficient to demonstrate that the loan was not granted.  The Agreement of Sale already says that when the loan is not granted that the Agreement is deemed terminated and the buyer is to receive their deposit.  The Notice of Termination is generally used when the Agreement provides one party with the right to terminate upon a set of circumstances.  The Agreement is replete with guidance that the party must notify the other, in writing, of termination.  The Notice of Termination fits this bill.  If you have questions on the Notice of Termination, see my article recently published in PAR JustListed! on this subject.

James L. Goldsmith is an attorney with Mette, Evans & Woodside and serves as general counsel to PAR. A substantial portion of his practice is dedicated to providing advice and counsel to real estate licensees. He and his firm represent and defend real estate salespersons and brokers in civil lawsuits and licensing claims across the Commonwealth. Jim also defends REALTORS® in disciplinary hearings conducted by the Real Estate Commission.

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