On June 1, 2021, a revised Additional Clause Addendum will be released for use by all members. The sole change to the form can be found on lines 37-44 and consists of a new provision titled Appraisal Shortfall. See revised form below.
As Arizona REALTORS® are undoubtedly aware, buyers are increasingly electing to waive the Arizona REALTORS® Residential Resale Real Estate Purchase Contract’s (the “Contract”) appraisal contingency due in large part to the fact that appraisal values are being returned lower than the parties’ agreed upon purchase price. In waiving the appraisal contingency, buyers are further agreeing to submit additional funds to address the gap between the purchase price and the appraised value. To reduce members’ risk resulting from drafting their own appraisal waiver verbiage, the Risk Management Committee deemed it beneficial to draft a new provision addressing appraisal shortfalls to be included in the Additional Clause Addendum.
Below is a list of frequently asked questions to help members better understand the new provision.
FREQUENTLY ASKED QUESTIONS
FOR ALL SCENARIOS LISTED BELOW, ASSUME THE PURCHASE PRICE IS $500,000 AND “$10,000” IS INSERTED ON LINE 40 OF THE JUNE 2021 ADDITIONAL CLAUSE ADDENDUM.
Q1. The appraisal comes in at $510,000. How much will Buyer be obligated to pay?
A1. Buyer will remain obligated to pay $500,000 because the new Appraisal Shortfall provision is applicable only in the event that the Premises fail to appraise for at least the purchase price. In this scenario, the Premises appraised for an amount greater than the purchase price.
Q2. The appraisal comes in at $495,000. How much will Buyer be obligated to pay?
A2. Buyer will be obligated to pay $500,000. In this scenario, the Premises failed to appraise by $5,000 and Buyer has agreed to pay the shortfall provided that the difference does not exceed $10,000. Because $5,000 is less than $10,000, Buyer is required to submit an additional $5,000, thereby requiring Buyer to pay a total of $500,000 to purchase the Premises.
Q3. The appraisal comes in at $475,000. How much will Buyer be obligated to pay?
A3. In this scenario, the difference between the purchase price and the appraised value is $25,000. However, Buyer has agreed to pay the shortfall only if the difference does not exceed $10,000. Buyer therefore has the right to cancel the Contract and recover the Earnest Money. Furthermore, Seller is not obligated to sell the Premises for $475,000, nor is Seller obligated to sell the Premises for $485,000 because the parties have agreed that if the difference between the appraised value and the purchase price exceeds $10,000, which it does in this scenario, “Seller is not obligated to lower the purchase price.”
Q4. The appraisal comes in at $475,000. Can Buyer make up the $25,000 shortfall?
A4. Yes, Buyer can voluntarily choose to make up the $25,000 shortfall if they are financially able to do so. However, as set forth in question three, the new Appraisal Shortfall provision does not require Buyer to do so.
Q5. If using the new Appraisal Shortfall provision, will Buyer ever be obligated to pay an amount greater than the purchase price set forth on line 10 of the Contract?
A5. No. Pursuant to the new Appraisal Shortfall provision, Buyer is only agreeing to pay the difference between the appraised value and the purchase price set forth in the Contract. As a result, the Appraisal Shortfall provision will not automatically cause the final price to exceed the purchase price set forth on line 10 of the Contract.
Q6. The final sentence of the new Appraisal Shortfall provision ends with the term “unless otherwise prohibited by federal law.” Why?
A6. This language mirrors the verbiage set forth on line 110 of the Contract addressing the appraisal contingency. When purchasing a home with an FHA or VA loan, the lender must ensure that the Premises serves as sufficient collateral for the amount it lends. FHA and VA therefore require an amendatory clause be made part of the sales contract.
The FHA/VA Amendatory Clause states in part:
“It is expressly agreed that notwithstanding any other provisions of this contract, the purchaser shall not be obligated to complete the purchase of the property described herein or to incur any penalty by forfeiture of earnest money deposits or otherwise unless the purchaser has been given in accordance with HUD/FHA or VA requirements a written statement by the Federal Housing Commissioner, Department of Veterans Affairs, or a Direct Endorsement lender setting forth the appraised value of the property of not less than $_____.”
The term “unless otherwise prohibited by federal law” reflects this language and highlights the fact that Buyer may cancel the transaction without penalty pursuant to the FHA/VA Amendatory Clause regardless of language contained in the Contract.
Q7. If the parties utilize the new Appraisal Shortfall provision and the appraisal notes conditions/repairs that need to be remedied before the loan will fund, can Buyer still cancel based on the appraisal?
A7. Yes. If the lender requires conditions/repairs be remedied before approving the loan and the conditions/repairs are not completed, Buyer can thereafter use the Unfulfilled Loan Contingency to cancel because the lender requirement would not be met.