Appraisal Contingency and the Loan Commitment

We have written extensively about the recent changes to the financing contingency contained within the FAR/BAR contract, most notably the creation of a seven (7) day window prior to closing in which neither party may terminate the contract as a result of the financing contingency. The prior contract version gave the parties the right to essentially cancel the contract up to the closing date.  The recent changes do not permit either party to cancel the contract pursuant to the financing contingency within seven (7) days of the closing date if the Loan Commitment Date has expired.

However, there are four (4) notable exceptions built into the financing contingency that permit the Buyer (not the Seller) to cancel the contract even during this seven day window.  They are as follows:

  1. The Seller defaults under the contract;
  2. The Property related conditions of the Loan Commitment have not been met (except when such  provisions are waived by other provisions of the contract);
  3. An appraisal of the Property obtained by Buyer’s lender is insufficient to meet the terms of the Loan  Commitment; and
  4. The loan is not funded due to the financial failure of Buyer’s lender.

We receive a lot of questions with regard to the “appraisal contingency” set forth in 3 above. It is important to note the following. First, the “appraisal contingency” set forth in item 3 is not a true appraisal contingency the way many might think it is. In other words, it does not mean that the Property needs to appraise for the purchase price.  The contingency only requires the appraisal to meet the terms of the loan commitment, whatever they may be.  Indeed, in some cases, the loan commitment does not require the property to appraise for the full purchase price, or specifically requires the Buyer to come up with additional funds should the property not appraise to a certain amount. Second, this contingency does not apply to cash deals.

As such, it is obviously very important to carefully review the loan commitment terms with your attorney, and if the Buyer (whether a cash buyer or a buyer who is obtaining financing) wants a true appraisal contingency (i.e. one that would permit the Buyer to cancel the contract if the property does not appraise for the purchase price), then the Buyer should use a separate appraisal contingency addendum up front (Item F under paragraph 19 of the Contract).

As always, should you have any questions, we encourage you to speak with an experienced real estate attorney.


Berlin-Patten, PLLC

This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.

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