Second appraisal puts deposit at risk

Q: I entered into a contract recently, but the deal went bad because the house did not appraise for the negotiated price.

We made an offer that the seller accepted contingent on the house appraising for the negotiated price. The sellers are real estate agents in the city.

I used to be a Realtor and questioned the appraisal because the comparables were taken from sales that occurred nine months ago and the cost per square foot was very high on the house we were going to purchase compared to the comparables.

The appraiser, our lender and our Realtor all assured us that the appraisal was good. So we went ahead with the deal and were approved for our loan.

When it came time to close on the house, our lender did not like the appraisal and ordered a second appraisal. That appraisal came in $55,000 below the first. We went back to the seller with a form to amend the price, but he wouldn't lower the price and insisted on selling it for the original price.

Of course, I wasn't going to get a loan for the original amount, and I wasn't about to pay cash to make up the difference, but I did not terminate the contract. The seller finally terminated the deal -- but now he wants my earnest money. He thinks he is entitled to it because we did not go through with the loan and our broker says he is entitled to it according to the contract.

My question is why is he entitled to the earnest money when the seller terminated the contract? I was willing to negotiate the price for the home but he was unwilling to negotiate. Also, shouldn't the lender be liable since they said the appraisal was fine but right before the closing they decide to revisit the appraisal and did not give us the loan?

A: You need to look at the term of your purchase contract to see whether the seller is entitled to keep your earnest money. Because the first appraisal came in at the purchase price and you had your loan approval, the contract may have obligated you to go through with the purchase. The risk under the contract for your lender requiring an additional appraisal might have been yours.

If you had qualms about that appraisal from your years of experience, you should have contested it then and made sure that your lender was satisfied with the appraisal. If you did discuss the appraisal issue with your lender and they gave you a loan commitment, you may have a right to go after your lender for their failure to fund on your deal. But you need to look at the fine print of loan commitment that your lender gave you. That loan commitment may have had conditions that allow your lender to re-review your credit and re-review the property right before the closing.

Many lenders are pulling second appraisals before closing because the price of homes is falling so fast in so many areas. So, that doesn't surprise me. And with the current flux in the real estate market, it also does not surprise me that a second appraiser looking at other information could come in at a much lower price.

As a side note, a financing contingency or appraisal contingency provision in a contract would give you, the buyer, the right to cancel the deal if you can't get financing or the home does not appraise out. However, these contingencies would require you to terminate the deal if you can't get financing or the home does not appraise by a certain date. If you fail to give notice in time, you would be out of luck.

Because the second appraisal came just before the deal closed, you were likely out of your contingency period. Since you live in Georgia and are buying a home in Georgia, you probably did not have an attorney review your contract. Your contract likely did not give you the right to terminate the deal so late in the game without forfeiting your earnest money.

One last issue, if you had the right to terminate the deal, you indicated that you decided not to terminate the deal but rather tried to negotiate to have the seller reduce his selling price for the home. Many appraisal contingencies would allow you to terminate the deal but not force the seller to reduce the sales price. If your contract was such that you had the right to terminate, you would have needed to terminate the deal and not try to reduce the price.

Consider reviewing your contract and your transaction details with a real estate attorney to determine whether you can get your earnest money back.

But if, after you talk to an attorney you find out that you can't get your money back, you might consider yourself lucky not to be purchasing a house that's worth $55,000 less than you were willing to pay.

To get even more valuable advice from Ilyce, visit her Personal Finance and Real Estate Center.

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