Understanding / or Not!!!
the
“Addendum Concerning Right to Terminate Due to Lender’s Appraisal”

This document was created to help with what happens when there is a difference between the agreed upon contracted price between buyer and seller and then the figure that comes into play when the buyers lender sends and appraiser out to the property to do an appraisal of value on the home so the lender is not lending more money than the home is actually worth (in the appraisers professional opinion).

First and foremost, the document is not one that is used in all cases.  This document is only used if there is a Third Party Financing Addendum associated with the contract as noted in paragraph 22 of the contract and that the buyers financing does not involve FHA Insured or VA financing.  For the most part that would mean the buyers financing would typically be a Conventional Loan.

There are three basic (I had to laugh out loud a little bit when I wrote “basic”) parts to this addendum:  
1.  WAIVER
2.  PARTIAL WAIVER
3. ADDITIONAL RIGHT TO TERMINATE

  • (1) WAIVER. Buyer waives Buyer’s right to terminate the contract under Paragraph 2B of theThird Party Financing Addendum if Property Approval is not obtained because the opinion of value in the appraisal does not satisfy lender’s underwriting requirements.

    If the lender reduces the amount of the loan due to the opinion of value, the cash portion of SalesPrice is increased by the amount the loan is reduced due to the appraisal.

  • (2) PARTIAL WAIVER. Buyer waives Buyer’s right to terminate the contract under Paragraph 2B of the Third Party Financing Addendum if:
    (i) Property Approval is not obtained because the opinion of value in the appraisal does not satisfy lender’s underwriting requirements; and
    (ii) the opinion of value is $________________ or more.

    If the lender reduces the amount of the loan due to the opinion of value, the cash portion of Sales Price is increased by the amount the loan is reduced due to the appraisal.

  • (3) ADDITIONAL RIGHT TO TERMINATE. In addition to Buyer’s right to terminate underParagraph 2B of the Third Party Financing Addendum, Buyer may terminate the contract within_______ days after the Effective Date if:
    (i) the appraised value, according to the appraisal obtained by Buyer’s lender, is less than $_______________; and
    (ii) Buyer delivers a copy of the appraisal to the Seller.

    If Buyer terminates under this paragraph, the earnest money will be refunded to Buyer.

Once the document has been agreed to by both parties, then it is signed by both as an addendum to the contract and presented along with the executed contract to the title company.

OK, now let’s try and figure out what each of these means to you… based on an example:
In this case, let’s say the home is listed for $500,000.00 and the contracted price on the contract is $550,000.00.  This is $50,000.00 over the listed amount.  Keep in mind, a lender is not going to lend money to a home buyer for more than what the appraisers value comes back at.
#1 WAIVER – ( I call this the “SO WHAT” WAIVER ) – When the appraiser went out to this property, he/she determined the value of the home to be $525,000.00.  This is less than the agreed upon contracted price on the contract.  This means the lender is only going to be willing to lend $525,000.00.  But in this case the buyer is fine with this and will cover the difference in additional cash of $25,000.00.  
#2 PARTIAL WAIVER – ( I call this on the “MAYBE” WAIVER ) – When the appraiser went out to this property, he/she determined the value of the home to be $525,000.00.  However, in this case, there are a couple of items to determine how this PARTIAL WAIVER will work.  Let’s say the seller has added the correct figure in the space provided in (ii) of $525,000.00, then both of the items can play a part in this where (i) states the appraisal value did not meet the lenders value of $550,000.00, however the buyer put in $525,000.00 so now the buyer is still obligated to buy the home provided they bring the cash difference of $25,000.00 to closing to make up the difference.  If the buyer had put in (ii) the value of $530,000.00 then the buyer could back out of the contract and get their earnest money back.
#3 ADDITIONAL RIGHT TO TERMINATE – ( I call this one the “NOPE” WAIVER ) – When the appraiser went out to this property, he/she determined the value of the home to be $525,000.00.  If the buyer has put in the value of $550,000.00, then anything below the value in the blank is determined not acceptable and the buyer can terminate the contract and get their earnest money back provided they provide the sellers a copy of the lenders appraisal and have done all of this within the time aloud in the first blank.

This is a very complicated document and there are a number of different types of situations that could take place, but these are just an example and to determine how the best way to handle it for your purchase or if you are the seller and want to know how to respond when negotiating a contract make sure and contract a Realtor® who you know has your best interest at heart!

This content is not the product of the National Association of REALTORS®, and may not reflect NAR's viewpoint or position on these topics and NAR does not verify the accuracy of the content.