The Addendum Concerning Right to Terminate Due to Lender’s Appraisal (TXR 1948, TREC 49-1) has three options that can change a buyer’s ability to terminate the sales contract because of an appraisal. Remember—the addendum is used only with the Third Party Financing Addendum (TXR 1901, TREC 40-9) and not used in transactions involving cash buyers or FHA or VA financing.
Here’s how the three options work:
Under the Third Party Financing Addendum, the buyers have the right to terminate if the lender determines the property does not meet underwriting requirements due to a low appraisal. If your clients check Waiver on the Addendum Concerning Right to Terminate Due to Lender’s Appraisal, they give up this right to terminate regardless of how far the appraisal is below the sales price. If the lender reduces the amount of the loan because of the low appraisal, the buyers must cover the difference between the loan and the sales price by bringing additional cash to close.
If your clients check Partial Waiver, they are also giving up the right to terminate if the appraisal does not meet the lender’s underwriting requirements. However, under this choice, the parties can agree on a limit of how low the appraisal can be when the waiver applies. Here are two scenarios:
- If the appraisal is equal to or greater than the amount written in line 2(ii), the waiver applies and the buyers cannot terminate. The buyers must bring additional cash to close if the lender reduces the loan, just as in the above choice.
- If the appraisal is lower than the amount in 2(ii), the waiver does not apply and the buyers may still exercise their right to terminate under the Third Party Financing Addendum.
Choosing Partial Waiver does not set an upper limit on the amount buyers will have to pay over the appraisal amount. It simply governs the appraisal amount upon which the buyer gives up the right to terminate.
Additional Right to Terminate
If your clients check Additional Right to Terminate, they have an additional right to terminate the contract due to the appraisal that is separate from the right to terminate under the Third Party Financing Addendum. This means the buyers could terminate under Paragraphs 2A and 2B of the Third Party Financing Addendum and this paragraph of the Addendum Concerning Right to Terminate Due to Lender’s Appraisal. Under the Third Party Financing Addendum, the buyers’ right to terminate only applies if the lender determines that the property does not meet the lender’s underwriting requirements. However, when Additional Right to Terminate is selected in the Addendum Concerning Right to Terminate Due to Lender’s Appraisal, buyers have the right to terminate if the appraisal falls below the amount filled in line 3(i), regardless of the lender’s requirements, provided that the buyers deliver a copy of the appraisal to the sellers along with notice of termination within the number of days listed in Paragraph 3. Make sure your clients consider the appraisal amount they are comfortable with and select a time period that gives the lender enough time to obtain an appraisal.