Appraisal Contingency

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Submitted by lookingtobuy on July 9, 2013 - 9:17am

Hi Everyone:

I'm a first time homebuyer and wanted to get some feedback regarding appraisal contingency, since I've just been countered with a request to remove it. According to my realtor, you are able to get out of a contract based on the inspection contingency. I have never heard of this, so just wanted to get your take. The property mentioned is in Scripps Ranch, and with inventory building up I would like to keep it just in case. But on the other hand, if it is not a real issue then I would rather remove and negotiate on other items such as price. Your thoughts will be greatly appreciated.

Submitted by HLS on July 9, 2013 - 9:34am.

there are 3 standard contingencies:
Appraisal, Inspection and Loan.
The 'standard' default for each is 17 days, HOWEVER it is negotiable.
YOU WANT those contingencies to be as long as possible to protect you, YES it is your way to get out if necessary.
I would NOT recommend removing the appraisal contingency. (UNLESS your situation is unusual)
Whose side is your agent on ???

I'm a licensed agent for both real estate & mortgage.
I'm not trying to take business away from anyone, but if you want a 2nd opinion contact me privately.
There's no charge or obligation.
I've helped many Pigg's through some difficult situations. HLS

Submitted by SD Realtor on July 9, 2013 - 2:09pm.

Actually the RPA for the state of california is very buyer friendly. There are a wide variety of ways for you to back out of the contract however you must do it in a timely manner as specified in the contract. You define those timeframes when you submit the contract.

There are formal contingencies referred to as appraisal, inspection and loan, however within the inspection contingency there is a wide berth for you. You can back out due to any sort of HOA restrictions, you can back out because of certain disclosures made by the seller, you can back out because you dont like the color of the leaves on the trees in the yard.

The reason for backing out is pretty much moot. The timing of when you back out is crucial.

Homes that are subject to multiple bids may send out counter offers asking for the appraisal contingency to be removed. You can remove it and if the appraisal doesn't come in you can still walk or try to renegotiate PROVIDED YOU HAVE OTHER CONTINGENCIES that have not expired temporally. The thing is that usually the appraisal is one of the last pieces of information that is delivered. So an astute listing agent will look at a contract, note the appraisal contingency has been removed but then ask that all of the other contingencies get pulled in to 10 days so the buyer cannot sneak out of the deal for any other reason.

There are plenty of ways to skin a cat.

There really should be no reason for you to remove the appraisal contingency unless there are several competing offers.

Submitted by lookingtobuy on July 9, 2013 - 2:22pm.

Thanks SD Realtor with your info. It seems in-line with what my realtor was saying. All the remaining contingencies (financing, and inspection) are at 17 days, which my realtor said was more than enough time for appraisal. Regardless, I asked my agent to call the seller agent today to negotiate on the appraisal contingency. If he is smart, he will understand that I can get out, also it benefits us both that this closes sooner than later (considering what's going on in the interest rate market).

Kinda off topic, I was thinking about using two different lenders to lock the rate on one and not on the other, in case of the rate decreasing by close. I guess this would also serve it's purpose on the appraisal. Any thoughts on doing this? Is it worth the extra $400 or so for an additional appraisal.

Submitted by SD Realtor on July 9, 2013 - 3:03pm.

I don't feel strongly either way about how many lenders you use. You just need to hustle and make sure the lenders submits the order for appraisal to whatever appraisal management company is being used. If you think the appraisal will happen quick, then hold off on the physical inspection until after the appraisal to save some money.

Submitted by HLS on July 9, 2013 - 9:02pm.

lookingtobuy wrote:
I was thinking about using two different lenders to lock the rate on one and not on the other, in case of the rate decreasing by close.Any thoughts on doing this? Is it worth the extra $400 or so for an additional appraisal.

It's more than just the cost of 2 appraisals & is
highly unfair & unethical on your part. A lock is a serious decision. It's a verbal commitment that you intend to proceed and your pricing is locked in.
How would you like it if several weeks after you lock, the lender says, "Sorry, we changed our mind. Rates have gone up and we don't want to honor our commitment"
It's like telling a stock broker that you want to buy a stock AND place an order at $20 a share and then renege to pay for it because it goes down below $20.

There is a lot of work that goes into preparing a loan file and getting it submitted and dealing with disclosures and underwriting. All the parties involved aren't going to get a penny unless your loan funds with them. Is that fair to them ?

The escrow company has to provide paperwork & info to the lender. I don't think that an escrow company
will provide this info to 2 different lenders at the same time.

There are lenders that I work with that offer a 'float down' policy. If rates move down at least a certain amount at a point in the approval process, they will give you an adjustment from the locked rate. It can actually cost them money to do this on the back end, as lock commitments are serious to the parties involved.

I completely understand what you want to do and why, but it really isn't fair to the one that you lock with. Lock fallout can cause a huge problem in some cases to them that you would never know about.

Submitted by njtosd on July 9, 2013 - 10:54pm.

Hmm - lookingtobuy - unless your lender makes some requirement of exclusivity prior to agreeing to a lock you are free to do as you choose. Lenders are big boys and girls and should know how to hedge their bets. There are lots of disappointments in the world - you need to look after your own financial well being.

Submitted by lookingtobuy on July 10, 2013 - 7:51am.


I understand where you are coming from, but I'm not sure that they match the loan funding prior to closing escrow. Also, my assumption is that unless you deal with a direct lender they probably just take a commission after they sell the note (thereby reducing any default or rate risk). The large banks have a lot of money earning greater than cost of funds elsewhere, hedging their Allowance for Loan Losses, Capital Reserves and deposit interest liabilities.

Submitted by HLS on July 10, 2013 - 8:50am.

You are free to do whatever you want to do.
I don't think that you really do understand where I'm coming from nor do you understand the industry.

I grew up in several industries (not only real estate) where deals are done with handshakes for many thousands of dollars. A commitment is a commitment. I don't go back on my word.
Trading stocks and bullion, prices move by the second, up or down. I don't always guess right but I NEVER renege on an agreement.

Your assumption that it's no big deal to lock a loan and then go elsewhere If rates drop is just a slimy thing to do.

I will be the first one to tell you that there are plenty of slimy, unethical people in the real estate and mortgage industry. Banks and direct lenders have ways of screwing borrowers that people never know about.
The 'know it alls' who think that they will always get the best rate by going to a 'direct lender' are just ignorant.
Your attitude is I'll screw them before they screw me.

Mortgage Brokers are regulated and similar to insurance brokers, are compensated based on the loan amount, and any excess credit MUST, MUST be passed along to you. there is no longer any incentive to upsell anything to a borrower, that the slimeballs were allowed to do a few years ago.

A direct lender/bank does not have to play by the same rules as brokers. Their misleading pitches sound wonderful to the foolish.

Mortgage brokers have commitments with wholesale lenders. Locks are a HUGE deal. Fallout is when loans are locked and then not delivered.
I know of a broker who took risks and locked loans for people he didn't know.
His fallout was too large and lenders stopped doing business with him. *this was not due to just one loan* but he suffered greatly.

I don't care whether you ever get a quote from me or not, if you want an explanation of how the system/process really works, feel free to contact me.
Most people have no idea how time consuming & complicated the approval/underwriting process is, and intentionally entering into 2 different agreements knowing that you are going to default on one of them with your attitude just speaks to character.
Don't worry, you aren't the only one. It's pervasive throughout society that people don't want to be responsible and look for ways to 'beat the system' and it's usually over money. Another post has the same attitude as you.

No bank is going to go out of business if you lock a loan and don't follow through. Deals fall apart all the time. Locking with a broker is a bigger deal to me, not only because of being in the industry, but the way that I was brought up.

Best of luck with your transaction, I hope that it works out for you.

Submitted by lookingtobuy on July 10, 2013 - 9:44am.

To your point I understand where you are coming from. The idea was posed to me from a mortgage broker, so I was posting it online to see if it was normal practice. From what I heard, this was pretty common in the industry so my assumption was that I would be an idiot not to do it. Now that I hear your side it makes me think otherwise. Obviously if it affects others then I will think about it. Thanks for your insight, it is well appreciated. On another note, what options do I have if the appraisal takes longer than the contingency period? That is actually a bigger concern for me at the moment.

Submitted by HLS on July 10, 2013 - 10:11am.

My main concern when I deal with clients is protecting their interest and deposit in a purchase transaction. I would not encourage you to waive standard contingencies unless there was a really, really good reason. What's their reason ?
Does the seller think that it isn't going to appraise for what you have agreed to pay ??
(Yes, you still have other ways to get out)

I know of agents whose main concern is how quickly they can get their commission and they give crappy advice and others that will not show buyers a property if it doesn't offer the highest commission. It's unethical but it happens.
You have entered into a legal binding agreement based on info that you received from the parties that you are working with.
A real estate agent or mortgage person should never offer legal advice, although many do.

I make sure that people understand what is negotiable and what isn't. Try to use a lender that offers a 'float down' policy. It can't hurt.
Not all lenders offer one.

Your appraisal MUST be ordered through each lender as part of the loan process. There are disclosures that must be prepared before appraisal can be ordered, and they must go through a 3rd party company. 7-10 days is USUALLY enough time to allow but there are a million things that can go wrong and delay the process.

Even though you may have agreed to the default 17 day contingencies, it is possible to request an extension prior to or at expiration, but the seller does not have to agree.

If your broker plays a game, I'm sure that they understand their risks.
I would not consider double applications to be normal practice. You are free to do it if you want to.
No lender,bank or broker can force you to proceed with a loan, locked or not.
Nobody is going to go out of business if you don't proceed with a locked loan.

If you do not proceed, the ONLY charges that you can expect to pay are for appraisal & credit report. You cannot be charged any other application or other fees that I am aware of.
The appraiser wants to be paid for their work, they don't care if the loan happens or not.

Serious point if you want to double app, is to check with escrow first, they may not be willing to provide the required info to 2 lenders at the same time.
If your broker is dealing with this, then that is their concern.

Submitted by lookingtobuy on July 10, 2013 - 10:39am.

Thanks for the feedback. Based on your points, I don't feel it is necessary to double-app. If for some reason the appraisal does take longer than expected and the seller does not want to extend the contingency period what happens? Do I have the ability to get out on the finance contingency, or do I forfeit my deposit? This is my first home purchase so want to make sure I have all my bases covered.

Also, regarding the purchase the seller was insistent on removing the appraisal contingency. Since we do want the house, we agreed even though it was not a multiple offer situation - especially since my main concern was negotiating the price and since my agent informed me there are other ways to get out if necessary under the inspection clause. Obviously I did my own due diligence and looked at market comps prior to agreeing-don't want to waste time or money for the appraisal if not necessary.

BTW, didn't mean to upset you with my earlier comments, just wanted some feedback regarding the idea.

Submitted by SD Realtor on July 10, 2013 - 12:17pm.

If it takes longer then expected you request an extension of the appraisal contingency. if the seller says yes no problem. If not then you get your deposit back and everyone walks away.

As I said above, if you have other contingencies to lean on and the home does not appraise then use one of the other contingencies. You do not have to be specific to the seller, there is no obligation. Just make darn sure you do it in the time frame you are alotted per the rpa.

Since you have removed the appraisal contingency then at day 17 or whenever your other contingencies expire you must fish or cut bait whether you have the appraisal number or not.

Your agent should have explained all this to you.

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