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Financing Contingency vs. Appraisal Contingency

If a contract includes both a financing contingency and appraisal contingency, where does one end and the other begin? There’s substantial overlap in the two contingencies, but they have very different rules.

ORLANDO, Fla. – When buyers negotiate a contract that includes both a financing contingency and appraisal contingency, they sometimes have trouble understanding where one ends and the other begins. This is understandable, since a contract with both contingencies contains substantial overlap.

Please note that different contracts can have very different rules, so this is not a discussion of general contract law. Instead, we’re looking specifically at the financing contingency contained in Section 8 of the Florida Realtors/Florida Bar Residential Contract for Sale and Purchase, which is the same in the “AS IS” version. We’re also looking at comprehensive rider F to the Florida Realtors/Florida Bar contracts, which is titled Appraisal Contingency. Both contingencies are designed to enable a buyer to get out of the contract and keep their deposit if specific events occur.

The appraisal contingency is straightforward. There are only two parts to negotiate. One is the price the appraisal must meet or exceed (if left blank, the amount is the purchase price). The second negotiable part is the deadline for the buyer to cancel the contract if the appraisal doesn’t meet the negotiated value. If the value of the appraisal is less than the amount in the blank, then the buyer has the option to cancel the contract by sending a written notice to the seller or seller’s representative before the deadline expires. If the buyer fails to obtain an appraisal by the deadline, then they can’t use the appraisal contingency to cancel the contract.

The financing contingency is a little more convoluted, so we’ll need to look at it in two parts. The first part focuses on the loan approval deadline. The buyer must timely apply for the loan specifically described in the contract (conventional, FHA, or VA, for example), and use good faith, diligent effort to try and obtain the loan. If they don’t have loan approval by the deadline (sometimes called a loan commitment or conditional approval), then the buyer can cancel the contract by sending a written notice to the seller or seller’s representative. There are many reasons why the lender may not give a loan approval. One reason is if the appraisal comes in low.

The second part comes into play if the lender approved the loan before obtaining the appraisal. If so, the contract provides “If Loan Approval has been obtained, or deemed to have been obtained, as provided above, and Buyer fails to close this Contract, then the Deposit shall be paid to Seller unless failure to close is due to…(3) appraisal of the Property obtained by Buyer’s lender is insufficient to meet terms of the Loan Approval, in which event(s) the Buyer shall be refunded the Deposit…”

So, how do these contingencies overlap?

Let’s look at the situation where the lender denies the loan before the loan approval deadline, due to an appraisal that didn’t meet the purchase price. If this occurs before the loan approval deadline and appraisal deadline, the buyer could use either contingency to cancel the contract. The buyer would only need one contingency but could technically use either to achieve the same result.

In the same way, let’s say the lender gives a conditional loan approval but rescinds that approval after the appraisal comes in low. If that low appraisal is given to the buyer before the appraisal deadline, then the buyer could use either contingency to cancel the contract.

At this point, you may be wondering when the appraisal contingency protects the buyer beyond what they already have in the financing contingency. There are a few scenarios, although they aren’t common.

One scenario is if the buyer hires their own appraiser to conduct an appraisal, in addition to any appraisal the lender may obtain. In that case, if the buyer’s appraisal comes in below the negotiated value in the appraisal contingency, they can use their low appraisal to cancel the contract, regardless of what happens with the lender.

Another scenario would be if the lender decides to go ahead with the loan despite the low appraisal. In that case, the buyer couldn’t use the financing contingency, because there’s no issue with financing. The buyer has been approved, and the lender is willing to close. But if the buyer is still within the appraisal contingency deadline, the buyer could use the low appraisal to cancel the contract. 

Any member who has questions about Florida Realtors form contracts, including the Florida Realtors/Florida Bar Residential Contract for Sale and Purchase, is welcome to call the Florida Realtors Legal Hotline at (407) 438-1409 between the hours of 9:00 a.m. and 4:45 p.m. on weekdays.

Joel Maxson is Associate General Counsel for Florida Realtors

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