Appraisal Contingency…A dangerous poison pill

Seller beware. Wisconsin’s Offer to purchase (WB-11) includes an escape clause for the Buyer. The Appraisal contingency on page 5 of 9 of the Offer to purchase allows the Buyer the right to terminate the contract if the appraisal indicates an appraised value for even one dollar ($1.00) less than the purchase price. That’s an easy exit and great risk an informed Seller would probably not accept. Savvy listing agents will catch this poison pill before the owner accepts the Offer.

What, you say buyers are unlikely to terminate an offer for an appraised value slightly less than the purchase price? OK. I agree. However, what else is on the table if the Buyer has a right to terminate the Offer? Oh, I don’t know, how about EVERYTHING? Consider this. The appraisal gets to the buyer 30 days from acceptance of the Offer. We’re probably 15 days from closing. The Seller is not in a strong negotiating position at this late date, and all of the other buyers who’s offers the Seller didn’t accept are gone. An inspired Buyer may choose to ask for more than a price concession. The closing date, included items, repairs, credits, new inspections, testings are open for discussion.

In competition, (Seller’s market)Buyer’s and their Buyer Agents are wise to soften the appraisal contingency if it has to be included. Below is a condition Buyer’s can add to their Offers to make their Offer more palatable to the Seller, and it’s a condition thinking-ahead listing agents will discuss with the Seller before an appraisal contingency Offer is accepted.  (Counter-Offer)

Appraisal Contingency page 5 of 9, lines 264 through 269. In the event said appraisal indicates the appraised value is not equal to or greater than the purchase price, Buyer shall deliver to the Seller the appraisal report and an Amendment to change the purchase price to an amount not less than said appraised value. This amendment shall include no other conditions and allow the Seller at least 24 hours from Seller’s actual receipt of the amendment and appraisal to accept. Acceptance of this amendment satisfies the Appraisal Contingency. The Notice of termination provided for in the Appraisal Contingency shall not be sent to Seller by Buyer prior to the expiration of Seller’s deadline for acceptance of the price change amendment.

IMPORTANT: Seller is not obligated to accept the price change amendment, and may deliver a counter proposal to Buyer. In lieu of the price change amendment, Buyer may give Notice to Seller that the Appraisal Contingency is satisfied.

That’s a lot of words. You might have a better idea, but this is more safe for the Seller and still provides the Buyer with the protection the contingency is intended to provide.  It may be necessary to talk to the other agent to make sure they understand this modification.

Side Note: The current WB11 is old. We were still in the recession in 2011 when the form was introduced. Comparable sales were few and far between. Buyers had a distinct advantage (Buyer Market) and they could shift risk to the Seller. The appraisal contingency was almost non negotiable. When the market shifted to a Seller’s Market, this appraisal contingency, already firmly embedded in the contract and common practice started to work against Buyers. Those who did get their Offers accepted with this contingency found themselves in surprisingly strong negotiating position. We can do better than to end up far down the line, away from the crowd of buyers, and all alone with the Seller, standing between a rock and a hard spot.

Why do we do that? Cuz, we always do.

Because that’s the way I was taught. Yup. That’s a common answer to a question that may get thought more than it get’s asked out loud. And that’s too bad. Change begins with asking, “Why?” Growth is stunted when we accept, “Cuz we always do”. Why do include the Appraisal Contingency in Offers?  Don’t tell me to protect the buyer. That’s not a reason we use the contingency. We use the contingency because it’s there.   And it’s been there since 2011. Carved in ink stone, that relic will protect  a person from an imaginary threat to the point of keeping them from ever getting a chance to appraise the property…cuz they came in second.

What’s wrong with that Appraisal Contingency? It’s old and  stuck in its way. It’s inflexible. It’s a seller unfriendly curmudgeon. It’s not a contingency, it’s an ESCAPE CLAUSE. Read it from the perspective of a seller… a seller who lives in a seller’s market. You can see the problem instantly…should the appraisal, which is a subjective process, show a value of even a dollar less than the purchase price the buyer CAN terminate the Offer. Will they? Probably not, but 30 days from acceptance the seller is in no good place to negotiate and without an agreement to modify the contract to something fair, the buyer is in a position to negotiate price, closing date, concessions of any kind.  Smart sellers and will pass your offer over if they have a smart buyer who knows they don’t need an overkill contingency to be safe.

Savvy Realtors are proactively thinking up better conditions to create a win-win for the buyer and seller who have an offer with an appraisal contingency. This is a version you’re welcome to copy:  Appraisal Contingency:  In the event that said appraisal shows a value less than the purchase price, buyer shall deliver to seller a copy of the appraisal and a signed amendment to the Offer to change the purchase price to appraised value amount. Said amendment shall include no other conditions and shall allow Seller one (1) day to accept. Buyer shall not deliver the Notice to terminate provided for in this contingency prior to seller’s deadline for acceptance of the price change amendment.

If you grew up thinking your’s is not to question why, your’s is to either do or die, there’s good news—you’re not gonna die…ASK WHY and find a better way.  Next contingency that has outlived it’s use is the “Buyer direct Broker to reject the listing broker’s offer of compensation. Seller to pay buyer broker  ____% at closing for buyer agency fees…” This monument to old times has no good reason linger longer…you know why, right?