Appraiser hired by lender owes a duty to buyer/borrower.

[Webbed Feet]

<....snip.....>

The reason there is a stiuplation in the sales contract that the home must appraise for at least the loan amount is to protect the buyer from having to foot the difference out of pocket. <.......snip......> .

Hamlet, it's not really the best way to handle that either. It is better for the buyer to have a real estate agent that advises a contingency of "Buyer to qualify for loan applied for, without any additional funds required from buyer, or buyer may cancel this sale contract with seller to return buyer earnest monies." Or something similar. What is far worse for a buyer than an appraisal being low, and having to make up the difference, is finding out they signed a contract that obligated them to complete the sale even if their loan fails.

The bottom line is there are other, much better, ways to protect a buyer from what you posted without hinging it on the outcome of the real estate appraisal. Hinging it on the appraisal is not necessary unless the buyer(s) are doing so for other reasons. That is one very good reason appraisers should consider refusing such assignments, or demanding a hold harmless agreement, and / or charge a very big fee.

 

[Hamlet]

Webbed, excellent and right on point, as always. Actually, in Ohio the sales contracts typically stipulate both contingencies that the buyer qualify for the necessary funds and also that the appraisal meet or exceed the loan.

 

[Calvin the Airedale]

The lender is not a party to the sales contract. The clause to make the sales contract contingent upon appraised value is really to protect the buyer from having to come up with the difference out of pocket between appraised value and sale amount if it falls short.

Yes, the contract is between the buyer and seller, but my point is this: who operates that clause? That is, who at closing, determines how this clause is enforced if not the lender? Has anyone else obtained an appraiser?

 

[DWiley]

Yes, the contract is between the buyer and seller, but my point is this: who operates that clause? That is, who at closing, determines how this clause is enforced if not the lender? Has anyone else obtained an appraiser?

On aspect of the "appraisal clause" in a sales contract is being tested in a Tennesee court right now. The sales contract contained a provision that the property must appraise for at least the sale price. However, because the borrower was making a 50% down payment, the lender only ordered an exterior-only appraisal - which came in at a price below the price, but sufficient to make the loan.

The seller engaged an appraiser to perform an appraisal with an interior inspection, and that appraisal came in just above the sale price. The buyer wants out of the contract, but the seller is trying to enforce the contract.

This will be an interesting case to follow. I have long wondered when someone would test this.

 

[Calvin the Airedale]

Why do you keep coming back to the lender? The lender was not even a party in this case and was not sued by the plaintiff.....the fact that the plaintiff's attorney apparently did not even see any liability on the part of the bank shouls tell you something.

I keep coming back to the lender because he is the pivot point of this transaction. He is the appraiser's client. The responsibility for the appraisal should utilimately rest with him.

Why is the lender not part of the suit? I would guess, not because the plaintiff's attorney sees no liability but because he sees no capacity to fulfill a judgment. I agree that the appraiser is only in this likely because of his E&O insurance.

FTR, I don't like this judgment either. However, it's the cards that have been dealt. I would rather be hopeful for any good that can come of it than whine about that which I cannot control.

 

[MS Rebel]

On aspect of the "appraisal clause" in a sales contract is being tested in a Tennesee court right now. The sales contract contained a provision that the property must appraise for at least the sale price. However, because the borrower was making a 50% down payment, the lender only ordered an exterior-only appraisal - which came in at a price below the price, but sufficient to make the loan.

The seller engaged an appraiser to perform an appraisal with an interior inspection, and that appraisal came in just above the sale price. The buyer wants out of the contract, but the seller is trying to enforce the contract.

This will be an interesting case to follow. I have long wondered when someone would test this.

Very interesting Danny. Keep us posted on this one.

 

[Calvin the Airedale]

On aspect of the "appraisal clause" in a sales contract is being tested in a Tennesee court right now. The sales contract contained a provision that the property must appraise for at least the sale price. However, because the borrower was making a 50% down payment, the lender only ordered an exterior-only appraisal - which came in at a price below the price, but sufficient to make the loan.

The seller engaged an appraiser to perform an appraisal with an interior inspection, and that appraisal came in just above the sale price. The buyer wants out of the contract, but the seller is trying to enforce the contract.

This will be an interesting case to follow. I have long wondered when someone would test this.

Back in 1998, my daughter landed in a very similar situation. They bid on a house (I had no hand in nor gave any advice regarding this purchase) with a financing contingency in the contract. Countrywide, their lender, had the home appraised. The value came in 10% lower than the sale price. At that point they wanted to back out of the sale (after then asking my opinion). Countrywide, hired another appraiser (one who was married to the managing office broker of the broker that had both sides of the transaction) to do another appraisal. That one came in at the sale price and my daughter was obligated to close the sale.

I have always contended that lenders in such a scircumstance (in control of the closing by virtue of their power to decide how the contingency of the sale agreement is fulfilled) breach a fiduciary obligation to the buyer in such situations.

When I read the riot act to the CW manager I was told that she had no choice, she has to take care of her brokers.

 

[DWiley]

I have always contended that lenders in such a scircumstance (in control of the closing by virtue of their power to decide how the contingency of the sale agreement is fulfilled) breach a fiduciary obligation to the buyer in such situations.

This is the key thing to be litigated, in my mind. The buyer and seller sign a contract with an "appraisal contingency," but then no one who is a party to the contract actually engages an appraiser to fullfill that contingency. Has the contingency been met by an appraisal ordered by the lender? It may well depend on the exact woring in the "appraisal clause" in the contract.

For several years now I have inserted a clause in all reports done on a 2055 warning that the intended use of the report specifically does NOT include meeting the "appraisal clause" in any sales contract that might exist.

It all goes back to intended use. An exterior-only appraisal may be sufficient for evaluating a low-risk loan, but it is not appropriate for meeting the appraisal clause, IMO. One size does not fit all.

In the case I am involved in the contract simply said, "subject to an appraisal." Well, the tax appraisal was higher than the sales contract. Would that count?

 

[Webbed Feet]

Mr. Wiley,

You make a great point that only proves how very, very, poorly thought out contingencies hinging around a lender ordered "Appraisal" are and continue to be. Professional real estate brokers, buyers, sellers, all continue on in a horribly misguided belief that there in only one kind of "Appraisal" and none of them stop for even a moment to think about the fact that a lender might order something else. Now, all of them have gone and created an undefined, meaningless, contingency inserted into one of the most important contracts most people will ever agree to. All based, ignorantly, on an anticipated action of a third party that is unknown and misunderstood.

Contracting for something, when the parties to the contract cannot possibly have reached a meeting of the minds as to what it was they just contracted for, not only is just stupid, it may very well not hold up in court at all. None of them had any reason to believe they knew what any lender was going to order, it could end up to be an AVM.

 

[Webbed Feet]

Calvin,

The last few posts should start to show you, clearly, why a lender never did and does not, have a "Fiduciary" duty to a buyer in this case. No buyer has any reason, or right, to believe any lender is going to order what they thought the lender was going to order. And none of them bother to check what might be ordered before they sign these stupid contingences!

If lenders really had some sort of fiduciary obligation in these cases they would be compelled to immediately contact both the buyer(s) and seller(s) to find out what in the ding dong was going through their minds when they created and signed a completely undefined "Appraisal" contingency. The lender, as an advocate, would have a duty to clear the bloody mess up before proceeding. Only it should be clear to you by the fact none of them do, never have, and I don't think have ever lost a court case based on not doing so, that they have no duty at all in that regard. The lenders order what they need for THEIR lending requirements! Not for the contracts between sellers and buyers. So where is the agency / advocacy Calvin?

If anything, or anyone, it is the real estate brokers that have real fiduciary duties that should be pulling their heads out of their asses and loudly (in writing) be immediately advising THEIR clients that they need a contract lawyer post haste! Because their clients are about to agree to an undefined contract clause that could spell trouble for everyone later on. The facts are, it is these "Agents" that are not doing so and not being trained to wake up to the fact that a real estate appraisal not only comes in many flavors, but the lender may not obtain one at all! ..

I appreciate why you want to see lenders held more accountable. At this point I think the entire country wants that. But I am at a loss to understand why it is you think any lender holds the power to decide the outcome of a contingency in a contract the lender did not create, is not a party to, and the parties that did create it don't even understand what they just created .............nor does the lender or any appraiser involved. The facts are, none of those parties have a clue what SOW means. They have no idea what, if any, SOW might be ordered by the lender. Therefore, they have no idea what they just agreed to if they expect some third party to make all the choices about it for them out of their control.

Personally, I think a good lawyer that understands the above could blow that entire contingency right out of the water as a completely invalid contractural agreement. How is either the seller or buyer going to show what was intended and that there was ever a meeting of the minds?