Editor’s note: PAR is publishing a series of articles on upcoming changes to several PAR standard forms which take effect on July 1, 2022.
One of the top changes from last year that has generated the most calls to the PAR Legal Hotline is the Appraisal Contingency Addendum (Form ACA). While we have received the countless comments and questions on the hotline, once we explain how the form works, it clicks with the callers. The changes in the new ACA do not change how it currently functions, we have just worked to create more clarity. These changes take effect on July 1.
There are two main changes you’ll see. First, instead of referencing “the terms of Paragraph 1” in options 1 and 2, we have now referenced the “minimum appraisal value,” which has been defined in Paragraph 1. Again, not changing how the form functions or what the term refers to, but instead, making the focus on the appraisal value.
Second, we simplified the language in option 2 to clarify that if the minimum appraisal value is not met, the addendum is null and void. This is how the document currently works, but by clarifying the language, the hope is that more agents will understand the intention of the options.
What’s the difference?
The question we get most often related to the ACA is about the difference between option 1 and option 2. I like to boil it down to what the buyer intends to do if the appraisal comes in low. In option 1, if the minimum appraisal value is not met, the buyer gets to terminate. In option 2, if the minimum appraisal value is not met, this addendum goes away, and the buyer relies upon the mortgage contingency, if elected. Reminder: The buyer does NOT have the right to terminate under the mortgage contingency, but it can provide protection if the buyer cannot obtain financing.
What’s the point of Option 2?
When discussing option 2, we often get the question, “What’s the point?” Well, it depends. When the minimum appraisal value is the same as the purchase price, there is not much of a point. However, when there is a large difference between the minimum appraisal value and the purchase price, there can be some great benefits to the seller. Let’s say the purchase price for a property is $250,000. In a typical scenario with only a mortgage contingency, if the appraisal comes in at $240,000, the buyer may be released from the contract by the seller if the LTV is not met. However, if they have used the appraisal contingency with the minimum appraisal value as $230,000, when the appraisal comes in at $240,000 the buyer now has to get creative to bring that extra money to the table. The key benefit here for the seller is the scenarios where the appraisal comes in above the minimum appraisal value, but below the purchase price.
We know there is a lot of confusion surrounding this form. These changes are intended to bring additional clarity to the use. Once agents figure out how to use the form, the form can be extremely helpful in negotiations. For additional help, PAR members have access to the Guidelines for Preparation and Use, which walks you through a more detailed explanation of each paragraph and provides useful practice tips and notes.
View the Legal Corner: Standard Forms Update webinar recording with PAR Attorneys Desiree Brougher and Kacy Clouser and PAR President Christopher Beadling.