Right to Terminate Due to Lender’s Appraisal

Mon, 06/14/2021 - 9:58am

Last year TREC promulgated a new form that allows a buyer to alter the existing Third Party Financing Addendum. The Third Party Financing Addendum permits a buyer to cancel the contract up to 3 days prior to closing if the property does not appraise for the sales price.  The new Addendum Concerning Right to Terminate Due to Lender’s Appraisal can be used to eliminate this cancellation contingency.  This form should only be used if the Third Party Financing addendum is being used and it cannot be used on FHA or VA loans.  

This form is intended to strengthen a buyer’s offer to give the buyer a competitive advantage.  In the form there are three options.  Assume for this Closer’s Corner that all other cancellation contingencies in the contract have expired.  

Option One: 

If a buyer chooses this option they are no longer able to terminate the contract due to the property not appraising for the sales price without losing their earnest money.  To close, the buyer will have to bring the difference between the sales price and the appraised value to closing in cash.  This option should be reserved for buyers that have the option to pay cash or have sufficient resources to pay any amount over the contract price.   

Option Two:

This option allows the buyer to set a maximum amount of cash over the sales price that they can contribute to the sale.  

For example, assume the listing price is $500,000 and the final contract was agreed to at $575,000.  Your buyer only has an additional $50,000 to put into the transaction.  If the buyer puts $550,000 in Paragraph 2(ii) they would be able to terminate only if the property did not appraise for at least $550,000.  If the property appraised anywhere between $550,000 and $575,000 they would be obligated to close and bring the additional funds to closing or lose their earnest money.  Let’s assume it appraised for $560,000. The buyer would have to bring the difference between sales price ($575,000) and appraised value ($560,000) to closing in cash which would be $15,000 plus their down payment and closing costs.  If the property appraised for $549,999 then they can cancel the contract and keep their earnest money.

Option Three: