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Tuesday, December 15, 2015

A Buyer Asks: What if the house does not appraise for the contract price?

At some point during the transaction, usually just after the inspection period, the Buyers' lender will order an appraisal on the property. Obviously, the lender does not want to make a loan on a property that is worth less than the sale price. As we have painfully learned in the past few years, sometimes the lender ends up owning the home if foreclosure proceedings are required.

So Lines 90-93 of the Arizona purchase contract includes an appraisal contingency stating:

"Buyer's obligation to complete this sale is contingent upon an appraisal of the Premises acceptable to lender for at least the purchase price. If the Premises fail to appraise for the purchase price in any appraisal required by lender, Buyer has five (5) days after notice of the appraised value to cancel this Contract and receive a refund of the Earnest Money or the appraisal contingency shall be waived."

So the Buyer can cancel the contract within five days of finding out the home did not appraise for at least the contracted sale price. But in practice, the first step usually is for the Seller to be asked to lower the sale price to the appraisal price. That is quite common and a smart Seller should strongly consider doing just that. After all, the next Buyer will also likely require an appraisal and the Seller could find himself right back in the same situation.

But note!  That contract language ONLY applies when there is a lender involved. If a cash buyer wants similar protection, that must be written into the contract separately and agreed to by the Seller. But more on that later.

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