Appraisal Contingency Addendum Changes

This year brings a newly revised Appraisal Contingency Addendum to the Agreement of Sale (Form ACA), which addresses member feedback on the structure and content of the prior form, and tries to reflect how usage of the form has developed over time. 

Purpose/Usage 

Form ACA is most often used when buyers will be using a significant amount of cash in the transaction. For an all-cash deal, it can help assure a buyer that the property value hits a certain minimum amount that they’re happy with. For buyers who will be financing a smaller portion of the purchase price than in a typical mortgage (e.g., 50% financing, 50% cash), it can ensure that the appraised value is sufficient to justify the loan, even if it’s significantly less than the purchase price. The form can also be used in a transaction where the buyer elects the mortgage contingency (see the last paragraph of this article for more information). 

Paragraph 1: Minimum Value 

The addendum doesn’t work unless the parties agree on a minimum appraisal value, so one of the three options in the first paragraph must be selected. 

a. Purchase Price 

If this choice is selected, then the property must appraise at the negotiated purchase price, whether through typical back-and-forth negotiations or through the operation of a Price Escalation Addendum (Form PEA). 

b. $________ less than Purchase Price 

This choice would most often be used when buyers who are getting financing know in advance that they have the ability to cover a certain gap in the financing if the appraised value is lower than the purchase price. For example, if a buyer knows that they could bring an extra $20,000 in cash to the transaction, if necessary, they might use this choice with some number up to $20,000 in the blank. 

This new choice will also be particularly helpful in conjunction when the form is submitted along with a Price Escalation Addendum (Form PEA), because the minimum appraised value now floats with the final negotiated price. This integration with Form PEA was one of the most requested changes for the form. 

c. $______________ 

This option is for buyers who want to see a certain appraised value regardless of the negotiated purchase price. It will primarily be used for cash buyers who simply want to ensure that the property meets a certain value for their own satisfaction, or buyers with financing who intend to borrow a specific amount and then cover the rest with cash. If the parties need the appraised value to adjust based on the purchase price, either of the two options may be more appropriate. 

Paragraph 2: Contingency Period & Appraiser Selection 

The second paragraph establishes the contingency period and who selects the appraiser. If there’s financing, the lender selects the appraiser. If the buyer is not obtaining financing, the buyer gets to select the appraiser. We also added language to make it clear that if the addendum is attached, the seller must allow the appraiser access regardless of what financing contingency may have been elected in the agreement of sale. Note that the appraisal must be completed within the Contingency Period, which has not changed. 

Paragraph 3: Minimum Value Is Met 

If the minimum appraisal value from Paragraph 1 is met (or if the appraisal is not completed within the Contingency Period), the buyer is obligated to purchase the property at the purchase price negotiated in the agreement of sale. Period. 

If the appraised value simply means that the lender approves a loan and the buyer moves ahead as originally planned, then that’s great. If the appraised value means that financing terms have to change in some way, this paragraph overrides the negotiated mortgage contingency and requires the buyer to make whatever necessary adjustments will allow them to complete the purchase (for example, adjusting the loan terms and/or bringing additional cash to settlement). It also makes clear that the buyer is responsible for any additional costs or fees from these changes. For members who have been using the form, this essentially combines the Option 1 and Option 2 choices from the prior version of Form PEA into a single paragraph. 

Paragraph 4: Minimum Value Is Not Met 

If the minimum appraisal value from Paragraph 1 is not met, the buyer can choose to negotiate with the seller or can simply terminate the agreement and have their deposit returned. To be clear, nothing in this paragraph requires a seller to agree to any contract changes – it simply offers the buyer an opportunity to try to negotiate a mutually acceptable agreement with the seller or to terminate the contract. And remember that, like other contingencies in the agreement of sale, the negotiations and termination must occur within the Contingency Period. Appraisal timelines can vary greatly in different markets, so buyer agents should be sure to set a reasonable time and to seek an extension as early as possible if it looks like the appraisal report may not be done in time. 

ACA v. Mortgage Contingency 

For buyers who are getting traditional types/amounts of mortgage financing, there is one primary difference between the mortgage contingency and this appraisal contingency. Under the mortgage contingency in the agreement of sale, if a low appraisal causes the buyer’s financing to be denied, the buyer does not have the right to terminate the contract, but is required to continue making a good faith effort to obtain the agreed-upon financing (if possible) until either the seller terminates or the closing date passes without financing. But with this Form ACA, if the appraisal is below the agreed-upon minimum, the buyer has a clear right to terminate the agreement of sale. Both buyer and seller agents need to understand this difference and ensure their clients are fully aware of what they’ve agreed to when negotiating these terms.