Buyers waiving appraisals? tread carefully
What happens when “Buyers waive appraisal contingency” is added into the sales contract? For a lot of Legal Hotline callers, the provision doesn’t do what they think.
ORLANDO, Fla. – We’ve already done a three-part series of articles in previous Legal Newsletters on the risks of waiving certain contract contingencies, but I wanted to write about something we hear far too often on Florida Realtors’ Legal Hotline.
Let me share with you a discussion I had on the Legal Hotline recently: A buyers’ agent called in about a transaction and said that the parties had the following line in the additional terms: “Buyers waive appraisal contingency.” The parties were using the Florida Realtors/Florida Bar AS IS Residential Contract for Sale and Purchase (“AS IS” Contract”) so this article will refer to the language in the Florida Realtors/Florida Bar contracts (“FR/Bar Contracts”).
It’s a short sentence, isn’t it? “Buyers waive appraisal contingency.” But it’s not short of being anything other than problematic in most situations.
First, the above language presumes that the contract has an appraisal contingency that can be waived. Let’s be very clear on something: the FR/Bar Contracts do not contain a built-in appraisal-to-the-purchase-price contingency. As a result, adding language like the above to the additional terms sections effectively waives something that didn’t exist in the first place.
If a buyer wants to ensure that the appraisal of the property matches the purchase price – and if not, they can cancel – they need to add the appraisal rider to the contract. Only the appraisal rider that goes with the FR/Bar contracts gives buyers the right to terminate the contract if the appraisal is less than whatever value they’ve put in the blank on the form. If buyers want to waive their ability to cancel the contract if the property appraisal doesn’t equal the purchase price, they simply don’t add that rider to their offer.
Wait, what? “But there’s appraisal language in the financing paragraph,” you’re saying.
You are correct, there is. But based on calls to the Legal Hotline, many callers don’t understand what the financing paragraph actually says. But I will get to that in a minute.
Second, adding “Buyers waive appraisal contingency” also assumes that buyers have the authority to waive the appraisal. While it’s possible for buyers to obtain their own appraisal, a majority of the time the appraisal is really the lender’s appraisal (or other valuation) of the property. So when buyers add this language to the contract, they’re effectively saying that the buyers are waiving the lender’s appraisal and, seemingly, the lender’s ability to refuse a loan based on the results of the appraisal.
While I personally haven’t conducted polls on this, I have yet to hear of any mortgage company that will lend funds without some sort of property valuation. This is typically a part of their lending process. To me, adding something like the above verbiage is as if the buyers are saying, “We are waiving our lender’s loan approval process to the extent it involves any appraisal of the property.”
Yet, in reality, the lender will still be going out and obtaining whatever type of property valuation they need to process and evaluate the loan. And the results of that valuation process will be a factor in the lender’s willingness to lend the funds to the buyers. (Note: Each lender has its own processes.)
Let’s address the financing language. What we’re hearing on the Legal Hotline is that many callers believe that buyers can cancel if an appraisal doesn’t meet the purchase price. As I said earlier, this is just not the case.
In fact, if you read paragraph 8(b), you will see that the term “purchase price” appears nowhere in that paragraph. But let’s nail down what 8(b) does say about appraisals.
When the most recent FR/Bar contracts were revised, the definition of Loan Approval was amended to include an appraisal. Buyers with a financing contingency are attempting to get a Loan Approval, which is not only obtaining a mortgage loan covering the terms as laid out in the contract, but also – and here is the actual language – “Buyer’s mortgage broker or lender having received an appraisal or alternative valuation of the Property satisfactory to lender, if either is required by lender, which is sufficient to meet the terms required for lender to provide Financing for Buyer and proceed to Closing (“Appraisal”).
Let’s break that down a bit in hopefully some plain language.
If the lender requires an appraisal/valuation of the property as part of the lender’s process in order to provide buyer financing, then that appraisal/valuation has to be satisfactory to the lender. And note that it doesn’t say the appraisal/valuation has to be equal to the purchase price! The appraisal/valuation only has to be sufficient to meet the terms required for the lender.
I emphasized the word “lender” because I want you, the reader, to note that we are not talking about any sort of appraisal/valuation that is satisfactory to buyers. Again, if buyers want an option to get out of the deal when there’s a difference in the property purchase price vs. the property’s appraisal, they’ve got to use the rider I mentioned earlier.
In emphasizing the word “lender,” I also hope readers can see why writing “Buyers waive appraisal contingency” in the additional terms doesn’t really work or likely doesn’t have the intended effect.
Bottom line: Lenders aren’t parties in the sales contract. Buyers can waive whatever they want, but when it comes to the waiver of appraisals/property valuations, they can’t force a lender to comply with contract language, including any reference to the lender’s appraisal part of the loan process.