You have accepted an appraisal assignment for a purchase. Your client is the lender. Upon reviewing the sales contract, the following preprinted language is in the sales contract:
“This contract is not contingent upon the Property being valued at an Appraised Value according to the Lender’s appraisal or other appraisal as agreed upon by the Parties, including but not limited to any VA, FHA or other Lender approved appraisal, for the Purchase Price or more. In no event will the Purchase Price be amended to match the Appraised Value. In the event that the Appraised Value of the Property is lower that the Purchase Price, Buyer understands and agrees that they will be responsible for any difference in amount or monies owed at Closing. Buyer is responsible for the full Purchase Price at Closing. This agreement is not dependent on any agreement between the Buyer and Lender and shall be in full force and effect as between the Seller and Buyer. “
First a little background. The contract is from an online “Disrupter “company” that does not follow the traditional real estate sale procedure. There are no agents involved and the company acts as middle man between the buyer and seller. Sometimes the seller is the “Disrupter” company itself.
So what are the obligations under USPAP for the appraiser?
We are to analyze the listings and agreement for sale and summarize our analysis. Standards 1 and 2 right? We do this all the time, so no biggie. Well, not so fast. There are quite a few things to consider with this language.
First we have to determine if this is an arms-length sale. We also need to understand the buyer’s motivations, not only for agreeing to the language in the contract, but for the purchase price. Did the buyer read the contract? Did they understand what they were agreeing to? Did the buyer or seller have any input into the language of the contact? Was the buyer educated on market value? Were they advised by a Real Estate Professional? Did they act in their own best interest? What if the seller is the “Disrupter “company”?
So how do we find out all of this information?
Simple, we need to talk with the buyer and seller.
Let’s assume you talk with the buyer and seller and the buyer was unaware of this language. What information is required to be summarized under USPAP? Do you include the buyer was unaware of the language? Do you report no agent was involved to properly advise the buyer? What if the buyer relied upon an AVM from the “Disrupter” company” as their due diligence? Did the buyer have a licensed appraiser complete an appraisal? How much detail do you include? Do you have an obligation to explain to the buyer the importance of an independent appraisal? Should you? Where is the line to be considered compliant with USPAP?
What about the bigger picture of this language? Is this a market value transaction? Does this sale become the new comp for the neighborhood? Will this sale be included in the next AVM that is completed for the neighborhood? Will the data aggregators pick up this sale to include in Collateral Underwriter? Will this sale be the new Fannie and Freddie benchmark? Does this feed into the next bubble? Should the dangers of such language be included in your analysis?
Appraisers are licensed to protect the public trust in our profession. Where is the line in that protection?
While I understand all of what you say, the bottom line is ” What is the Market Value”, not what are the motivations of the Buyer and seller.
It just drives me crazy that the psychological aspects seem to be taking a front seat to the process rather than letting the Financial lenders worry about the psychology of the transaction. What is the market value? Based on current trends, recent sales and current listings? Drives me crazy!!!!
How about this, train us in psychology, lender tactics, subterfuge, inspections, title search and FEMA rules for flood zone designations! LOL!
Respectfully, you could not be more wrong VaCAP!
In the cited scenario our client is the lender. Not the buyer or the seller. We are obligated to analyze the contract. We are not hired to counsel or consult with the signatories to the contract to determine whether they understood it. How presumptuous that would be. Not to mention outside the scope of work that we were hired for. Again respectfully, it amounts to self-imposed scope creep of a type that could inappropriately involve us in litigation, or result in a complaint being filed against us by sellers or the so-called disruptors.
Personally, I think anyone that signs such a contract is being very foolish. There are many reasons for this, but the bottom line is that they are signing away one of the most fundamental protections found in real estate purchase agreements today. I am automatically suspicious of companies that use such language. Personally, I’d question the enforceability of such a waiver but that is also not my job.
The borrower has been told that if an appraisal comes in lower than the contract price that they would still be held to their purchase offer. The buyer has signed stating that they accept this term. They may even have been influenced by outright fraudulent behavior by one or more parties to the transaction. If so, that is a job for their attorney to deal with…not me.
I have two legitimate options when confronted with such contract language. (1) I may withdraw from the assignment, or (2) I can make sure that my report is absolutely bulletproof and that whatever the result and conclusion(s) is/are, that it’s clear that no other credible result could be possible. It’s a pretty high bar. One that is usually used when litigation is anticipated.
Sounds like you’re practicing Law without a License. You can lead a horse to water but you can’t make them drink. And you can’t stop people from being stupid. If a buyer enters into a bad contract that is not my problem or place to tell them so.
I agree with what VaCAP is stating. In order to fully analyze the contract and summarize it in your report, you need to know if it is arms length or not, You also need to know the motivations of the buyers and sellers, especially if the appraised value differs from the contract price. Including this information in your analysis and commentary in explaining the difference helps the reader understand the situation. You know the lender is going to ask, so why not include it from the beginning?
Other than that, all VaCAP is doing is asking some specific questions to get appraisers to think. Something many appraisers need to do more of.
“First we have to determine if this is an arms-length sale.”
– Yes we need to do this by reasonably determining that there is no relationship between the parties that would influence the contract, and that the parties were not under undue duress from each other. In contract analysis we are comparing the contract to the typical contract in the market. One should discuss conditions (ex: financing concessions) that are atypical of the market.
” We also need to understand the buyer’s motivations, not only for agreeing to the language in the contract, but for the purchase price. Did the buyer read the contract? Did they understand what they were agreeing to? Did the buyer or seller have any input into the language of the contact? Was the buyer educated on market value? Were they advised by a Real Estate Professional? Did they act in their own best interest? What if the seller is the “Disrupter “company”?”
-Absolutely not. One of the first rules of appraising is that you are there to value the property, and not the person. Under no circumstances should an appraiser be commenting or opining on a person or group of persons. We are to value properties, and not delve into the psychological thought process of an individual(s). The market as a whole, yes, when it can be empirically derived, but never an individual or identifiable group of individuals. To do so will invite certain scrutiny from HUD if it ever got past the compliance police at the lender.
The tactics and strategies of contract negotiations are as varied as the markets themselves. Yes, we often see poorly written contracts (many times written my Realtors who should know better), but that has nothing to do with determining arms-length. If the buyer and seller perceive or believe that what they are doing is in their own best interest, even if they are walking over a cliff, then it is arms length.
Contracts without an appraisal contingency were quite common a few years ago when cash sales were king. It was one of the only ways a buyer using financing could compete. There was nothing nefarious about it, and I do recall a few deals dying with the buyer losing their deposit.
With respect to any suspected criminality this should be immediately discussed with the client, and not part of any formal written opinion in the appraisal report.
Best Regards,
Tobby
For those who are stating you do not need to know the motivation of the buyers and sellers for the analysis, I suggest you read the article by USPAP instructor and mentor Richard Heyn. The motivation ties directly to the definition of market value pre-printed on the 1004.
https://www.aciweb.com/sales-contract-analysis-part-4-summarizing-the-analysis-or-wheres-the-beef/