Appraisal contingency protects buyer, allows price reduction

Mortgage adviser: Jim Valler, Holmgren & Associates.

Property type: Single-family home in Richmond.

Purchase price: $396,000.

Appraised value: $380,000.

Mortgage: $342,000.

Mortgage type: 30-year fixed.

Rate: 4.375 percent with no points.

Backstory: My clients were first-time home buyers looking in Richmond to accommodate their growing family. Their agent, Felipe Acobes with Better Homes and Gardens Real Estate in Oakland, located a threebedroom, two-bathroom home that met all of their requirements.

The property had some complexities, however, including a partially finished garage and bonus room — both done without permits — and a significant amount of deferred maintenance. The list price was $399,000, a figure that was expected to be overbid in this market.

The buyers offered $428,800, which was accepted. In this competitive market, it is not uncommon for buyers to pay a price that does not discount the existence of unpermitted improvements and property defects.

When this happens the appraised value sometimes does not justify the purchase price. In these instances the buyer may be willing and able to increase the down payment to make up the difference. In this case, the buyers were already getting gift funds from relatives to make the 10 percent down payment and cover closing costs, so they had little ability to bridge any price/ appraisal gap.

Fortunately, Acobes had put an appraisal contingency into the offer to protect the buyers in case of a value under the offer price.

Because of the property permits and repair issues, the appraised value came in at $380,000. Acobes was able to work with the seller to renegotiate the property price down to $396,000. Without this renegotiated price the buyers would have had to bring in a down payment of $86,800. Instead they just needed to bring in $54,000.

Buyers are often advised that they will be more competitive if they don’t have contingencies for things like financing, appraisal or inspection.

This routinely works out fine, but in cases in which the buyer’s agent recognizes a potential appraisal problem, a prudent agent collaborates with the lender and buyers to structure an offer that protects the buyer and results in a transaction that works for the seller.

Jim Valler, Holmgren & Associates, 510-220-6610,

jim@mortgageholmgren.com.