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The hot seller’s market in Texas has created confusing situations involving financing and appraisals. Here are answers to your questions about using the Third Party Financing Addendum and the Addendum Concerning Right to Terminate Due to Lender’s Appraisal from Ron Walker, co-chair of the Texas Real Estate Commission Broker-Lawyer Committee and former general counsel for Texas REALTORS®.

Third Party Financing Addendum

How do you calculate the property approval termination deadline?
Paragraph 2B says that the buyer can terminate “not later than 3 days before the Closing Date” if the lender determines that the property does not meet property approval. That wording confuses people. Here’s an example: If closing is on Friday, three days before is Tuesday. Because the addendum says the buyer needs to terminate “not later than” three days before closing, the buyer must terminate under the property approval paragraph before Tuesday—in practical terms, he must terminate by Monday.

If “This contract is not subject to Buyer obtaining Buyer Approval” is checked in Paragraph 2A, can a buyer still terminate under property approval?
Yes. The buyer approval contingency (Paragraph 2A) goes away, but the property approval contingency remains.

How should you write an offer if the buyer is using a hard-money loan?
Hard-money loans, such as an investor securing a loan using his real estate portfolio, should be written as cash offers. Hard-money loans are not one of the financing options listed in the Third Party Financing Addendum.

If an FHA buyer receives an appraisal lower than what’s in the blank in Paragraph 4 and says he will bring more cash to the transaction to make up the difference, what can my seller do to make sure that buyer is locked in and won’t change his mind and terminate?
The seller could request a written statement from the buyer that the buyer has been provided the appraisal and that the buyer is proceeding and will not terminate.

Addendum Concerning Right to Terminate Due to Lender’s Appraisal

Think of the appraisal addendum in two parts: Paragraphs 1 and 2 favor sellers, and Paragraph 3 favors buyers.

If a buyer selects Paragraph 1, Waiver, how does that affect the Third Party Financing Addendum?
Choosing Paragraph 1, Waiver, eliminates the buyer’s ability to terminate when the lender determines the property does not satisfy the lender’s underwriting requirements (Paragraph 2B in the Third Party Financing Addendum).

If Paragraph 2 is selected and the appraisal comes in lower than the sales price, is the seller required to lower the sales price to that amount?
No. None of the paragraphs in the addendum require the seller to come down to the appraised value.

Can a buyer insert a number in Paragraph 2(ii) that is based on the additional cash they are willing to bring to closing rather than the appraisal amount?
No. The form only allows you to put in the opinion of value—the appraised value—because it is referencing the appraisal language in Paragraph 2B of the Third Party Financing Addendum. You will have to do some math to come up with a number that works for your buyers based on the additional cash they are willing to bring. Here is a simple formula that can be used to determine the opinion of value to insert in Paragraph 2(ii). This formula assumes the lender will maintain the same loan to value (LTV) ratio with the lower appraised value.

Sales Price – (Additional Cash / LTV%) = Paragraph 2(ii) amount

For example, the sales price of a home is $250,000 and the buyers want to finance $225,000 with a $25,000 down payment. A 90% LTV. The buyers are willing to put down an additional $4,500 if necessary. The buyers could insert $245,000 in Paragraph 2(ii) as the minimum appraisal they are willing to accept. With a $245,000 appraised value and 90% LTV, the loan amount will be reduced to $220,500. The down payment will be increased to $29,500 to total the $250,000 sales price. The buyers will be required to bring an additional $4,500 cash with their original $25,000 down payment.

$250,000 – ($4,500 / 90%) = $245,000

Note: Any additional cash a buyer may be required to bring depends on the lender’s reduction of the loan amount. The lender’s decision to reduce the loan amount is based on numerous factors, including underwriting requirements and the type of loan, which may affect the above calculations.

How does Paragraph 3, Additional Right to Terminate, affect the buyer’s rights under the Third Party Financing Addendum?
Paragraph 3, Additional Right to Terminate, adds to the buyer’s existing right to terminate under Paragraph 2B of the Third Party Financing Addendum, which says the buyer may terminate if a low appraisal results in the property not meeting the lender’s underwriting requirement. However, a property could satisfy the lender’s underwriting requirements even when the appraisal comes in low. Paragraph 3 gives the buyer an additional right to terminate for a low appraisal regardless of the lender’s requirements.

For example, buyers may be putting down $100,000 to buy a $400,000 property. If the appraisal comes back at $375,000, the lender will still fund the $300,000 loan, because it’s lower than the appraised value. But if the buyers don’t want to pay $400,000 for a property that appraised at only $375,000, this paragraph gives the buyers the right to terminate based solely on the low appraisal.

My buyer is applying for FHA financing. The seller is requiring that all offers include the Addendum Concerning Right to Terminate Due to Lender’s Appraisal with the buyer waiving his right to terminate due to a low appraisal using Paragraph 1 or 2. Can my buyer include the addendum with the offer?
No. The appraisal addendum cannot be used if the transaction involves FHA-insured or VA-guaranteed financing. Federal law requires the language in Paragraph 4 of the Third Party Financing Addendum be included in a purchase contract involving FHA or VA financing. The buyer’s right to terminate in Paragraph 4 due to a low appraisal cannot be waived by the parties. The seller should understand that an FHA/VA buyer could terminate the contract if the appraisal is lower than the sales price. The FHA/VA buyer does have the option to complete the transaction after receiving the low appraisal by bringing additional cash to closing. The seller could ask for a much larger option fee as compensation if the buyer backs out.