Just under half (estimated to be in the upper 40% percent range) of home purchases in Florida are made with cash, leaving slightly more than 50% made with financing. When a buyer is financing a home purchase, a critical component is the lender’s determination of the subject property’s value (commonly known as an “appraisal”).
How does a Lender use an Appraisal?
An appraisal assesses a property’s market value, ensuring that the lender’s investment in underwriting the loan is prudent. If the appraisal is lower than the contract purchase price, the lender may either:
- Reduce the loan amount
- Deny the application for financing
The result leaves the buyer scrambling to cover the difference, renegotiating the purchase price with the seller, or considering cancellation.
Can a Buyer Cancel a Contract After a Low Appraisal?
In today’s fluctuating Florida real estate market, low appraisals are occurring more frequently (e.g., declining market, overpricing, condition of property) and can jeopardize a transaction. A more specific answer to this question depends on the contract terms and timing. Most Florida real estate contracts (particularly the FR/BAR “As Is” and “Standard” contracts) include a financing contingency allowing a buyer to cancel the contract without penalty if the buyer cannot secure financing within a specified period of time (typically 30 days, but sometimes longer).
If a low appraisal leads to financing denial and the buyer acts within the prescribed timeframe (prior to expiration of the Loan Approval Period), the buyer can typically exit the contract and retain their deposit. However, if the Loan Approval Period has lapsed, the buyer may face challenges in canceling without financial repercussions.
Is there a specific Appraisal Contingency for which a Buyer can gain Additional Protection?
Not all Florida contracts include explicit appraisal contingency language. However, the FR/BAR F. Appraisal Contingency rider specifically allows a buyer to terminate a contract if the property doesn’t appraise at or above the purchase price, regardless of financing approval. This rider can also be used as an addendum to a contract where no financing contingency is utilized (i.e., a for cash contract), where a buyer does not require financing but does not want to “overpay” for the property. Cash buyers lacking financing contingency protection should proceed with caution. Without an appraisal contingency, a buyer may be required to complete the purchase at the agreed price, even if the appraisal is low.
How can an Agent assist in Guiding Clients through Appraisal Challenges?
Agents play a crucial role in:
- Educating clients about the implications of low appraisals.
- Ensuring appropriate contingencies are included in contracts.
- Recommending appraisal contingency clauses when appropriate.
- Monitoring contingency deadlines to protect client interests.
- Facilitating communication between buyers, sellers, and lenders to navigate appraisal discrepancies.
- Preparing clients on how to approach renegotiation vs cancellation of a contract.
Also, a buyer’s ability to cancel a contract after a low appraisal hinges on a contract’s specific contingencies and adherence to deadlines. Agents should proactively address these potential issues to safeguard their clients’ interests and ensure smooth transactions.
Should you have questions or need further guidance in navigating appraisal challenges or financing contingencies in general, consult your local real estate attorney for advice and assistance.
