Appraisals & Upper Bracket Homes

Risk of Not Appraising Borne by Buyer

The very rich are different from you and me.

--F. Scott Fitzgerald

Fitzgerald might have added, "and so are their home transactions."

One of the features of truly upper bracket homes is that the individuals who buy them -- by definition -- are people of substantial means.

If they need a mortgage at all, it's often for a relatively small percentage of the purchase price (in lender parlance, their "loan-to-value" ratio is low).

So far, so good.

The downside of pouring so much equity into a home is that the Buyer may not have an out if the home doesn't appraise.

Primer on Financing Contingencies

That's because a bank that has a $3 million dollar home as collateral securing a $1.5 million loan (loan-to-value = 50%) doesn't really care if the home actually appraises for $2.9M; they're still amply secured.

But the Buyer may care a lot!

Normally, when an appraisal comes in low, the bank won't make the loan, and the Buyer's Financing Contingency fails.

Voila! The Buyer can get out of the deal.

Now go back to the hypothetical above.

The loan appraisal comes in low . . . but the bank doesn't care.

So, the Buyer in such a circumstance loses their "out."

To protect themselves, more upper bracket Buyers are inserting language into the Purchase Agreement specifying that the deal is "contingent on the home appraising" for the negotiated sale price.