Financing Contingency & Appraisal

We didn't have a financing contingency in our contract (our broker said not to worry,they could not sell it if it didn't appraise at closing value!) then the apt appraised below
and we had to make up the cash difference at closing :(

#2 what did you lawyers say? it's the attys who negotiate these things. NEVER NEVER NEVER trust a broker on these matters. the only way the apt wouldn't sell if it wasn't appraised at your price is if you DO have a financing contingency.

Having no financing contingency or a "no finance contingency" you're opening yourself up to a risk that you may have to go through with the deal by coming up with extra cash or else lose your deposit if the property is appraised under price.

We used an attorney that was recommended by our broker. I think the attorney wanted the
deal to close (being friends), rather than looking towards our best interests.

Next time I would search for a top real estate attorney and meet with them before even talking with a broker.

so is consensus to go in with or with out the financing contingency?

if you're a buyer, go with a financing contingency. and get a good lawyer.

Definately agree. ALWAYS go with the finance contingency -- i.e., a mortgage contingency clause. Any seller who refuses to grant one simply does not want to allocate risk fairly or evenly.

Can someone describe the appraisal process? How or why would a property be praised below-value?

in nyc there usually is no mortgage contingency simply due to the demand. as far as appraisals go, usually the appraiser and the mortgate broker are in cohoots so typically that wouldnt be a problem. usually when your atty asks the seller's atty for a mortgage contingency it raises red flags as to what kind of buyer you are - which most likely will not work in your favor in this market.

#2, didn't you have a cause of action against that lying/stupid broker?

Appraisals are based on comparables in the building and the surrounding area. Look not only to similar types of units but also to the price per square foot of other units in the building and so on. Appraisals can be a problem when the market moves up faster than the comparable sales. That should not be a problem in today's market, which is fairly flat.

Also, I agree with #7 and disagree with #9. Mortgage contingency clauses are not red flags. They are there for the prudent buyer's protection. Conversely, red flags should be raised against any seller who refuses them because it signals that they will not be accomodating if you need an extention on a deadline etc. In fact, if you do not have the clause, the seller has the incentive to make sure you can't get a mortgage and thus they get to keep your entire deposit, no questions asked.

caveat emptor - buyer beware

anyone who uses an attorney recommended by the broker deserves what they get. NEVER do this.

my attorney not recommended by my broker. he is still saying that most bids do not have financing contingency.

#11 you obviously dont own in manhattan. mortgage contingencies are NOT common practice in NYC. if you dont believe me, try it. see what the seller has to say...and then prepare to lose your apt.

there's always someone who is willing to not have a mortgage contingency which is better for the seller...because if you dont get financing approved the seller is set back on time, etc.

desirable coops rarely permit mortgage contingencies these days. Small building and townhouse sellers never do. I dont know in what areas and with what budgets these attorneys generally work?Not trying to be disrespectful, but try insisting on a mortgage contingency in the village, soho tribeca etc, and you are likely to lose the deal.Understandable that attorneys would try to protect their clients by insisting on contingencies, but more than once I have watched buyers protected right out of a deal.

OK I admit I am a broker, and it has been a while since I have seen a financing contingency. I can't see how that raises a red flag about a seller--clearly the prospective buyers need to be made aware in what circumstances they might be denied a mortgage or have to cough up more than anticipated. That broker who misled the buyers by saying they couldnt sell if it didnt appraise should be on the hook in some way, regardless of whether the statement came from ignorance or from an intention to deceive, it is still unacceptable.

Seems that whether or not there is a contintency depends on two factors, (1) the market (buyers vs. sellers) and (2) how good your lawyer is at negotiating relative to the other party's lawyer.

If you've been pre-approved for a mortgage and are a savvy buyer you should already know if there will be issues with your credit, also contact your lender as your atty reviews the contract to make sure there are no issues with the building/unit.

Without a contintency the main risk for the buyer is if the unit is appraised under price, which can happen in a softer market.

you will never get a mortgage contingency in a good co-op. I have sold 3 in the last 6 years and the language was required to be deleted from the contract (as was the "washer-dryer" language). Just bought in new development in tribeca and there was specific language that made it clear that no deal would be done with a contingency.

A good lawyer won't help here . . . most sellers just won't let it happen.

agreed. its a function of manhattan real estate. if your atty is pushing for the mortgage contingency it shows that you feel there may be a possibility that you cannot afford the apt...which is a waste of everyones time...and you become a less desirable candidate, because, lets admit it, its a sellers market! (i'm not a broker or an atty, just bought an apt). i've never heard of (my friends who own, colleagues, etc.) someone's apt getting appraised for less than the accepted offer price.

#21, actually someone I know had their apt appraised below the offer price. This wasn't in manhattan, though but in one of the outer boroughs, 2 years ago. And there was a finance contingency so he was able to get out of it.

#15, I'm #11, and I do own in Manhattan.

And to #21, you can easily afford the apt, be pre-qualified, have impeccable credit, have a great job, and still run into problems.

All the mortgage contingency does is to protect against unexpected changes in the market or economy and other unpredictables like job loss or accidents. If the buyer is not a prime candidate, I understand the seller not wanting to go along with the clause. Conversely, when the buyer has all the credentials, it is unnecessary for the buyer to assume risk for things so out of his control, especially when the seller is hardly hurt at all. A loss of a few weeks on the market is simply not equivalent to the loss of a 10% depoist.

it takes 5 minutes to get preapproved for a mortgage -- even if you don't go with that broker it is worth doing. mrtg brokers can tell you with a few pieces of financial information how much they can get you

It's easier to get approved for a mortgage then to get board approved... I've bought twice and sold once and all were "no finance contigencies". As a seller, I would never assume the buyer's risk by allowing the contract to be contingent on financing. If you are pre-approved for a mortgage the chances of getting rejected by a bank for a mortgage are incredibly slim.

#23, what problems were you referring to, once you have fulfilled to the basic requirements e.g. putting down 25%-30%, pre-qualify, good job etc.?

the big risk here isn't whether you can get a mortgage, it's whether the property is appraised below the offer price. 2 issues here - a) the appraisal doesn't happen until after the contract is signed & deposit is paid, and b) if the property is appraised below the offer price the bank will only lend based on the appraised value, NOT the offer price; therefore buyer must come up with the difference or else lose his/her 10% deposit.

In this case the buyer is protected with a finance contingency. Without it the buyer is at risk, esp if you think the market may drop between contract signing & closing. Even riskier if you're buying a coop because of the longer process.

Thats what we ran into. Our coop didn't appraise at contract price and we had to make up the difference at closing or lose our 10% downpayment.

The next month the coop decided to do some upgrading and we got hit with a 178.00 monthly
assessment for the next year added to our regular monthly maintenance fee.

Best bet is to be prepared by having plently of cash for problems that might
come up.

Alas I just lost an apartment because I would not agree to removing the no finance contingency. Have the money/pre qual etc but just couldn't bear the pushy/cheap car sales tactics of the seller's broker & I suspect the seller was looking to dangle my offer. This is a sellers market but apartments that are on the market over 100 days become buyer pickings & I can wait until the end of the spring bloom.

Alas I just lost an apartment because I would not agree to removing the no finance contingency. Have the money/pre qual etc but just couldn't bear the pushy/cheap car sales tactics of the seller's broker & I suspect the seller was looking to dangle my offer. This is a sellers market but apartments that are on the market over 100 days become buyer pickings & I can wait until the end of the spring bloom.

Listen, I don't care what anyone says and I don't care what the norms are in NYC, (I live own and live in a coop on UWS), you should NEVER get rid of the finance contingency clause. It is in the standard contract for good reason, so that both the seller AND buyer are equally protected in the deal. Think about it folks, this is NY. ANYTHING can happen between the time you sign the contract and you get your loan Committment. Not to be crass, but things like terrorist attacks (let's say your building happens to be on the corner where therr was a subway incident), job loss, etc. It's called RISK MANAGEMENT and should not be considered a red flag to the seller, especially if you're pre-approved, etc. #20, you are wrong...you can get contingency's in 'good' buildings.

#31 here. Kudos to you #29! You didn't really lose anyhing except for a crappy deal that was being crammed down your throat by a pusher seller.

#31, can you explain HOW a finance contingency protects the buyer?

What happens if the buyer is pre-approved for a mortgage but the unit is appraised below price? In that case the buyer has to make up the difference and may not have the cash flow available. Or if he does, may affect his financial profile when submitted to the coop board.

Not true #33. This is why keeping the financing contingency is soooo important. If the appraisal comes in below the offered price (for whatever reason - declining market, building has fire....really, whatever you can think of), you the buyer can walk on the transaction. You DO NOT need to make up the difference. You WOULD need to make up the difference if you had NO contingency.

There is another option - which is what I did. Dont sign until you have the appraisal. I was able to get an appraisal within a couple of days and written in about 3 more days. So you can have no financing contingency but get an appraisal before you sign. Alternately, you can have no financing contingency but have an appraisal contingency. AFter my experience and since he didn't think of this early enough, a colleague of mine just did the latter. This avoids the appraisal risk.

I'm not so sure this is just about the appraisal risk. There are things that happen that are beyond anyone's control. What if you lose your job? Now, you may think that anyone with enough money would never be in danger of losing their job, but just take a look at any Fortune 500 - sr. exec's constantly get reshuffled. #35, you're solutions are great and really are a good happy medium. However, I for one would never sign without a financing contingency clause. I guess I like my 10% deposit more than I've liked any apartment.

#31-- sellers walk from buyers with financing contingencies in this market b/c they can. there's always some schmuck who gambles on his/her purchase without it. Personally, I'd be reticent to do without, but frankly, buyers with superb credit needn't fear that much UNLESS the negotiated price is just plain north of out of whack.

#33-- Financing contingency is simple. Says if buyer cannot obtain satisfactory financing, the contract is canceled. Its a condition predecent to the consummation of the performance of the contract.

#35, I tried that but in my case there was a rush to have the contract signed (agreement with the seller). Also, the bank wouldn't send the appraiser without the signed contract.

I looked into buying a couple of places and each time found it difficult for a seller to agree to a finance contingency.

#31, I don't understand how it protects the seller - what if you sign the contract, stop showing the place and a month later the buyer can't get a mortgage for whatever reason? The deal falls through and you've lost time in selling your place.

#31 here. The financing contingent doesn't protect the seller. It protects the buyer. It acts to balance the risk between both parties, otherwise the buyer is taking ALL the risk, which is not really a great position. I really do understand that in a sellers market this is the first thing 'to go'; Buyers have little negotiating power in a sellers market. I'm simply saying think really hard about your deposit and the risk of something going south before you sign a contract without a financing contingency. It's the same thought process you might use around having or not having car insurance. If you choose not to have insurance, really you're betting that nothing will go wrong. That something out of your control jus will not happen. Like a taxi would never never go through a red light and hit your car. That never happens in NYC.

Not a perfect example, but one that makes sense to most people. Would you really ever drive around without car insurance??

As for sellers, they should vett through candidates financials as should their broker/attorney. You can even ask for a credit score. My point is, there are fairly easy ways for buyers to know if the buyer is a 'good' buyer and is just being a savvy business person for keeping the contingency in, or is a 'poor' buyer who they should walk away from. A good buyer should never let the financing contingency be used as a sword in negotiations period. This is just my opinion, which is what this board is all about.

Correction to my post above.

"My point is, there are fairly easy ways for SELLERS to know if the buyer is a 'good' buyer and is just being a savvy business person for keeping the contingency in, or is a 'poor' buyer who they should walk away from."

As a condo seller, I had a buyer with a financing contingency back out of the deal because his financing didn't go through. Despite having a pre-approval, the buyer's bank had new issues because he was a Bermuda resident and new anti-terrorist/money laundering government b.s. required more hoops. I received all the bank's issues as evidence. The buyer was smart to have this contingency. It ended o.k. for me, we sold about 2 weeks later to a back-up buyer at the same price, fortunately.

But the bottom line is that in a seller's market, sellers can demand what they want and they should refuse contingencies if they can get away with it. In a buyer's market buyers will be more demanding. My guess is we will see more buyer financing contingencies in the future.

As a condo seller, I had a buyer with a financing contingency back out of the deal because his financing didn't go through. Despite having a pre-approval, the buyer's bank had new issues because he was a Bermuda resident and new anti-terrorist/money laundering government b.s. required more hoops. I received all the bank's issues as evidence. The buyer was smart to have this contingency. It ended o.k. for me, we sold about 2 weeks later to a back-up buyer at the same price, fortunately.

But the bottom line is that in a seller's market, sellers can demand what they want and they should refuse contingencies if they can get away with it. In a buyer's market buyers will be more demanding. My guess is we will see more buyer financing contingencies in the future.

I don't see how the financing contingency guarantees anything for you as a seller (goldie). If the Bermuda buyer didn't have the financing contingency - he still would not have gone through with the deal. You would not have had a sale - perhaps you might have had his deposit but likely he would even try to litigate that. So I dont see a financing contingency as a guarantee to the seller esp. in the case where things happen to the buyer's financing which are out of his/her control (e.g. job loss).

#43 -- thats cause you're not bright. if there's no contingency re financing, and buyer cannot get financing and does not go through on the deal, the deposit is forfeited. thats what a deposit is FOR. you can "litigate" that but even form sale contracts you can get at Staples are clear on that point and you'll be laughed out of court.

I am pretty bright - thank you very much. I am just guessing people i NY care about their money and may still try to litigate otherwise they lose it all otherwise. I didn't say for sure they would win.

Thank you very much for your insult #44. I am #43 and I am very comfortable with my level of intelligence given my everyday job duties and progress in life.

At any rate - The seller still would not have sale! The deposit does not equal the value of the property.

ok people. the bottom line is this. the manhattan real estate market is dictated by the seller, has been, and probably always will. its not fair to be turned away for insisting a mortgage contingency but it has and will continue to happen. manhattan real estate cannot be compared to anywhere else in the country, even the outer boroughs. so if you want an apt and can afford not to have a mortgage contingency, buy in ny. if not, then you should really stay away because no seller will be forced into having one.

#45 You clearly operate at a grade school level. Lets put this VERY simply. Deposit forfeited (normally 20% on contract, which in manhattan hovers arounf $200,000 on average) and seller can resell and in this market should have no problem. transaction costs for the delay? yes. More than $200,000? No. What about this concept is not clear to you.

I understand that concept and this is the end of my discussion with you as you are clearly a bonafide as@#hole in your style. The deposit I am familiar with though is generally 10%, so I would like to correct you on that. I could be wrong because I bought a condo, but I also know that a friend who bought in a 30% down building had to put 10% after signing.

At any rate - your style is caustic. This is over for me.

All - yes, it's a sellers market and sellers can always find buyers who are willing to waive the financing contingency because the buyer, if something goes wrong, has all cash (or something) to pay for either the difference in the appraisal price or the total lack of a loan. Fine. I still own in NYC, bought 8 months ago, spent 1MM for in a nice coop, am well employed, yada yada, BUT I still made sure that there was a financing contingency. I was also very prepared to share ALL of my finances with the sellers brokers so they knew I was for real. To me, 10% (or 20%) is a lot of money. Money that I worked hard to earn. No way am I going to put it on the line for a seller who is brandishing the contingency as a sword. Not in NYC. Not anywhere.

Your situation is the exception not the norm. In this market most sellers will not accept a contingency and there are many buyers who will agree to a non-contingent contract. I suggest you speak with a mortgage broker first to see if there could be any problems with your credit, once you are comfortable with the mortgage process and you have an offer on the table, try to get an appraiser into the apartment immediately so you will have the bank appraisal before signing the contract.

Update from #29/ #30. This morning I accepted to remove the contingency clause ... but at a price - lowered my offer - which was duely accepted. Seems that if a contingency clause is worth something to the seller it is worth something to the buyer. Lets call it a bet which the buyer gives unfavourable odds.

Plevey - #50 hear. You are a broker so I'm going to ask you: why do you continue to beat the drum that something MUST be wrong with the buyers finances if they want a contingency clause?The contingency clause protects the buyer in case of other, unforseeable things that could impact banks wanting to lend money - loss of job, fire in the building, water damage all of a sudden from upstairs...whatever. People always look at this issue from the buyers credit perspective. How about looking at it from a risk management perspective? Do you ever represent buyers? #52. Good for you for reducing your offer!

Anonymous #53--unfortunately the financing contingency also protects the flakey whimsical buyer who all of a sudden changes their mind for no good reason after havingtaken the property off the market, probably costing the seller numerous other deals and squandering the seller's time and money etc. It is very easy to get turned down for a mortgage if that is what you want. Look at it from the seller's risk management perspective.

hey plevy, if u have any brains, please consider using them. especially for starter apartments like studios and 1BRs, which frequently cater to first time homebuyers, do you expect them to have a cash-deal?

if the appraised value came in below the transaction price (or the mortgage bank is unsatisfied with the co-op's financials), why should the buyer bear the risk of having to chip in the difference, or risk loosing 10% deposit, which is REALLY hard earned money for the young professionals. the seller is just being greedy because they're looking for the perfect idiot to buy their overpriced property and not be scrutinzed by the mortgage bank.

for higher end properties, maybe it's more frequently to not have a financial contigency, since they're cash-deal anyway. but for those first time homebuyers, i'm not willing to take that risk that offers virtually no reward.

and some idiot above talked about "risk management". i work in risk management field, and it's all about having a large enough sample that variance is minimized, and we know what the expected risk is. But for buying an apartment, it's only sample size of 1, either success or failure. you can have 20% DTI and 5 years of liquid reserve and a 800 FICO score and $0 debt and a preapproval from a mortgage lender and STILL end up not getting a mortgage.

hey plevy, if u have any brains, please consider using them. especially for starter apartments like studios and 1BRs, which frequently cater to first time homebuyers, do you expect them to have a cash-deal?

if the appraised value came in below the transaction price (or the mortgage bank is unsatisfied with the co-op's financials), why should the buyer bear the risk of having to chip in the difference, or risk loosing 10% deposit, which is REALLY hard earned money for the young professionals. the seller is just being greedy because they're looking for the perfect idiot to buy their overpriced property and not be scrutinzed by the mortgage bank.

for higher end properties, maybe it's more frequently to not have a financial contigency, since they're cash-deal anyway. but for those first time homebuyers, i'm not willing to take that risk that offers virtually no reward.

and some idiot above talked about "risk management". i work in risk management field, and it's all about having a large enough sample that variance is minimized, and we know what the expected risk is. But for buying an apartment, it's only sample size of 1, either success or failure. you can have 20% DTI and 5 years of liquid reserve and a 800 FICO score and $0 debt and a preapproval from a mortgage lender and STILL end up not getting a mortgage.

#56--the financials should be scrutinized by the buyers attorney prior to contract signing. Assuming that all is in order from that perspective, and assuming your scenario outlined above of perfect credit, 0 debt, 20%dti etc...why would this person be unable to obtain a mortgage?

Plevy, how in the world are you going to get the appraisal done before signing the contract? The only appraisal that matters from a financing perspective is the one the bank orders. That won't be ordered until the application is completed, which includes a signed contract. If the bank's appraiser appraises the apartment at less than the purchase price, they bank won't agree to a higher appraisal simply because the buyer is able to produce a higher appraisal.

Can you imagine if they would? It would be a prime opportunity for mortgage fraud.

#57, the person with an ideal credit profile might be able to get a mortgage. But if the appraisal is less than the purchase price, they would have to make up the difference at closing. Even someone with perfect credit and a low debt/income ratio may not be able to do that if they are using all their cash on hand for the down payment and closing costs.

To #56. I'm the 'idiot' that mentioned risk management. I too work in the risk management world, so bugger off. MY point, if you had actually READ, was a buyer must manage their downside risk. This is simply about common sense not statistics. If you'd like to go head-to-head with stats, bring in on though. I'm sure we'd either amuse or bore most people on this board. One more thing: high end properties are NOT mostly all cash. So, you're credibility in terms of actually knowing what you're talking about is, well, zero. To your point, either "success or failure". Guess you failed.

If I were to sell I would require a loan committment and skip the pre approval because it really does not mean anything.

The problem #61 is that most lenders won't provide a loan committment without a signed contract. The financing contingency is within the contract. There is another possibiliy...

Keep the financing contingency as part of the contract, but only make it valid for something like 10 business days. This may be a good middle ground for both the buyer and seller, at least as far as initial financing is concerned. Doesn't really do anything for unforeseeable events. The buyer can get the appraisal done within 10 days as well as a committment letter and if they can't then the seller can move on quickly to another buyer.

Even if the unit did not appraise for the negotiated price of the apartment, that does not mean you lose out on financing, it just means they will finance up to the value of the unit.

So for example, if you offered 500K for a studio and this studio requires 100K down (20%), then you need to finance 400K. If the studio is only appraised for 450K, that does not mean you need to front up any more cash, because you're only financing 400K. However, if it's appraised for only 350K, then you need to put up 50K to make the deal go through. That's where the risk is.

Now you tell me, with co-ops, 20% to 25% down is usually the norm for downpayment. If you've done your homework, your co-op should NOT appraise for less than 75-80% of the negotiated price. If it does, well, frankly, you should have done a bit more homework.

#62, you're wrong. Any reputable mortgage broker / lender will provide a loan committment letter without a signed contract.

#64 - not usually.

All - this is all really idiotic. The reality is that the hot sellers market dictated that the financing contingency could be used to weed out buyers with tons of cash vs those who needed a mortgage. It's silly not to have something that protects the buyer, but there you have it. Now, we are heading into a buyers market so I really suggest that buyers be tough about keeping the contingency, even in a 'smaller' form - 10 days, etc.

"Now, we are heading into a buyers market so I really suggest that buyers be tough about keeping the contingency"

What are you talking about? Since when did Manhattan become a buyers market?

Re-opening up this thread - any thoughts on the financing contingency/appraisal contingency in a BUYER'S market now versus years ago when it was a SELLER'S market? Thanks!

Unless you can pay cash for the place, you're insane to sign a contract without a mortgage contingency.

CURIOSITY123- It may be a "Buyer's" mkt, but Lending Standards are still pretty tight. Not every Joe Schmoe can get a mortgage these days, so it is still not a "Borrower's" mkt yet. You absolutely need a mortgage contingency or you risk losing your deposit.

Of coures any co-op board president who approves a buyer who even needs a mortgage is insane.

Huntersburg: "Of coures any co-op board president who approves a buyer who even needs a mortgage is insane."

Don't most buyers need a mortgage in NYC? If coop boards didn't approve people who needed a mortgage, that seems to me like it'd be a very vacant building, no?

Co-op boards, and their presidents like NYCMatt, always apply a higher standard to new buyers than themselves - this would be consistent with Matt's attitudes.

We were in a bidding war and ours was the lowest offer, but the only one without a financing contingency. When the first buyer fell through the seller wanted the bidder most likely to close and that was us. We had a rush appraisal done by the bank before returning the signed contract.

REMom: Did you still have a contingency included based on appraisal value?

NYCMatt: "Unless you can pay cash for the place, you're insane to sign a contract without a mortgage contingency."

Exactly. Even those who plan to purchase in new developments should try to get this in their contract--so many nowadays just assume that it's something you just can't ask for in a new development contract. However, you'd be surprised at how many sponsors are willing to allow this.

Cur123: No, I did not have a contingency based on appraised value, but I did not sign the contract until I got the appraisal back, approx. 4 days later.

Isn't the mortgage contingency so standard that you can ask for it *even if* you can pay cash for the place?

I got one even though the agent and I were about 90% sure that I wouldn't be able to get a mortgage.

Come to think of it, I probably should have made a lower offer but without the contingency. I didn't know you could do that -- live and learn.

sellers prefer no financing contingencies. this occurs in strong markets. Mark G. Zussman Co-op and Condo Appraisal Services mzussman@gmail.com

If the building requires 25% down, is that enough margin for the bank to accept lower appraisal value?