Out-of-Whack Appraisals Lead to a Dispute Over the Deposit

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

The offer was accepted by the seller contingent on the house appraising for the negotiated price. An initial appraisal found that the value met the price. However, I used to be a real estate agent and questioned that appraisal. The comparables were taken from sales that occurred nine months ago, and the cost per square foot was high on the house we were going to purchase compared with those sales.

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

When it came time to close on the house, our lender 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 it.

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. I did not terminate the contract, however. 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. Our broker also says the seller is entitled to the money according to the contract.

Why is the seller entitled to the earnest money when he is the one who terminated the contract? I was willing to negotiate the price for the home, but he wasn't.

Also, shouldn't the lender be liable because it said the appraisal was fine, but right before the closing revisited 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 your loan was approved, the contract may have obligated you to proceed with the purchase at that point. The risk under the contract that your lender would require an additional appraisal might have been yours.

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

Many lenders now are pulling second appraisals before closing because the price of homes is falling so quickly in so many areas, so I'm not surprised your lender did so.

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.

Generally, a financing contingency or appraisal contingency provision in a contract would give you, the buyer, the right to cancel the deal if you could not get financing or the home did not appraise. However, these contingencies would also set a deadline for you to terminate the deal. If you failed to give notice in time, you would be required to proceed or lose your deposit.