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from Local Attorney, Michael H. Wasserman

Tuesday, April 8, 2008

Mortgage Appraisals & Real Estate Contracts

Most every Buyer I represent in a home purchase needs a mortgage financing contingency as part of their contract. That is the weasel clause that lets a Buyer escape out if he cannot get the necessary financing. Mortgage lenders use a variety of factors to decide if they are going to lend that money, one of which being the property's appraised value: "is there enough value in the home to justify (secure) the loan"? If the value isn't there, the loan will not be approved, if the loan is not approved, the Buyer invokes the contingency. if the Buyer invokes the contingency, the deal is (almost always) canceled.

Back in February, I posted comments on a presentation made to the Illinois Real Estate Lawyers Association regarding mortgage appraisals in the current market. The presenter described the tighter standards lenders were imposing on their appraisers to try to guard against lending too much money against properties located in areas suffering declining market values.

I guess it was only a matter of time before I would see a client's deal nearly scuttled by a low appraisal. After all, the harder it is to get a property to appraise, the more difficult it will be for a Buyer to secure appropriate financing, the less likely the deal will go through. (Kinda like asking how many licks it takes to get to the center of a Tootsie Pop) Two licks? Nope, Two months!

So here is what is happening: A most excellent client wants to buy a condominium. She battled a competing Buyer who wanted the same unit. Bidding war! She is paying full asking price, but at least she is getting the home she really wants. Only now, the mortgage appraiser says the property is worth $20,000 less than the agreed purchase price! (Yikes!)

Ordinarily of course, the lender would refuse to make the loan and Pop goes the weasel! Not so, dear reader. (Yikes, again!) My client, you see, has the wherewithal to make a big down payment. Her financing clause only requires that she accept an 80% (of purchase price) loan. Even with the "low" appraisal, the lender is willing to lend. No weaseling out based on the financing contingency; She can get the loan!

Will the client be forced to overpay for the property? Drum roll please... good lawyering to the rescue. Fortunately, I anticipated this scenario early on when prices started declining locally. For months now, I have insisted that all Buyer contracts be not only contingent on a lender willing to make the loan, but also on an appraisal at the agreed purchase price.

In this instance, the lender's appraisal is low for reasons that are somewhat unique to this property and appears to be more reflective of the provable value rather than the home's actual value in the marketplace. We are pretty confident right now that the property is worth what my client is paying and we will almost certainly go forward. But, most importantly, my client has the opportunity to decide for herself, and will not be forced into buying this home.