A recent Smart Money article, "How appraisals are derailing home sales" points out that lenders have established new and much more stringent requirements for appraisals to support mortgage loans. The result is that many deals are being jeopardized when the appraisal comes in below the sale price and the financing applied for is not available. When this happens, the buyer may want her deposit back and the seller will be unhappy at that demand.
The problem is that the "standard form" real estate contract commonly used by brokers creates a critical ambiguity that may result in a needless battle. The problem is in the mortgage contingency clause, which provides that a buyer may cancel if mortgage approval is not obtained by a specified date. On its face this sounds fine, but as always the devil is in the details.
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Consider the situation where a buyer receives mortgage approval, but that approval is subject to conditions that the buyer cannot meet or did not expect. This could include a "satisfactory appraisal" or an appraisal at a specified value. What then? While New Jersey Courts have interpreted mortgage contingency clauses to mean and require that the buyer have a "firm" commitment, and have allowed Buyers to cancel and get their deposit money back where the commitment had conditions outside their control. Davis v Strazza, 380 N.J. Super 476 (App Div. 2005), who wants to have to go to court because the contract is unclear?
So we always recommend that the contract make clear that the buyer must have a "firm" mortgage commitment that results in availability of mortgage funds at closing, except where the inability to get financing is due to something within the buyer's control, despite good faith efforts.
No one wants a real estate deal to go sour, but even less do we want to end up in court. Given the fluid market we are in, careful review and careful drafting is called for. An experienced attorney should be consulted to make sure there are no unwelcome surprises
This post is well written and informative. I don't comment often, but it doesn't cost me anything to say it when its true.
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