Should a Cash Buyer get an Appraisal?

An interesting question was posed on Trulia Voices yesterday:

“John”, a self-identified home buyer in Gilbert, AZ asks:

Should I get an appraisal ? Cash buyer.

I am buying a home in Gilbert Az.. 85296, it is a short sale. Sale price is approx, $265,000. I am getting an inspection on the property but was wondering if its worth the expense to get an appraisal. Price seems in line with other similar homes I have seen in the area based on square footage and condition. What % of time do the appraisals come back less than the sale price ??

Several agents responded to the question, and the general consensus was that yes, the buyer should get an appraisal.

While open forums like Trulia Voices have been known to drive me crazy, they do provide a great way to see what kind of questions/concerns real estate buyers and sellers have. And reading some responses from “professionals” will either make you laugh, contemplate jabbing a fork in your eye, and occasionally make you say, “That dude knows his stuff”.

Enough on Voices and similar platforms. Here are my thoughts on whether a cash buyer should get an appraisal. Of note: the contractual and other statements here only apply to those utilizing the standard Arizona Association of Realtors Residential Resale Purchase Contract. Mileage will vary for those in other states, or those foolishly using a contract form purchased from Office Max or printed from “FreeRealEstateForms.com”.

Lenders require an appraisal. They want assurances that the property they are lending on is valued at or below the loan amount. A cash buyer on the other hand, isn’t dealing with a lender and therefore is not required to have the property appraised. (Though I’d think a cash buyer would want the same assurances on value…)

Required or not, personally I think an appraisal is a good idea. If for no other reason than it may provide some peace of mind that you are getting what you’re paying for. Getting a professional “third party” opinion on the value of something as significant as a piece of property just makes sense.

This begs the question though, of what – if anything – does it mean if the appraisal comes in lower that what you’ve agreed to pay?

What can you do if the appraisal comes in low?

It depends. In the standard Arizona Association of Realtors Residential Resale Purchase Contract, there is boilerplate language that protects a buyer with an appraisal contingency if the buyer is financing the property.

2c. 59 – 61. Appraisal Contingency: Buyer’s obligation to complete this sale is contingent upon an appraisal of the Premises by an appraiser acceptable to lender for at least the sales price. If the Premises fails to appraise for the sales price, Buyer has five (5) days after notice of the appraised values to cancel this Contract and receive a refund of the Earnest Money or the appraisal contingency shall be waived.

However, there is a short little statement in line 49 of the contract that effectively removes this contingency for cash buyers:

49. IF THIS IS AN ALL CASH SALE, GO TO SECTION 3.

A cash sale results (in effect) in the entirety of Section 2 (Financing) to be removed from the contract. Section 2 is where the appraisal contingency lies. So if you pay cash, you don’t have the “out” that the appraisal contingency provides.

Personally, I think this is a flaw in our current contract language. But the simple fact is, no contract can contain enough boilerplate language to cover every possible scenario and protect everyone from an incompetent preparation of the contract.

The solution is (relatively) simple. The Arizona contract provides an area where “additional terms and conditions” can be written in to the contract. Have your agent add language that will provide an appraisal contingency for a cash purchase.

I suspect right about now, some real estate agent and/or broker is saying, “Whoa buddy, only attorneys can add language to a contract or purchase agreement!” And  that is true in many states. But out here in the wild west, Article 26 of the Arizona State Constitution grants licensed real estate brokers and salespersons “the right to draft or fill out and complete, without charge, any and all instruments incident thereto”. In English, licensed Arizona brokers/agents can complete real estate contracts. This may, or may not, be the case in other states.

I think Steve Belt summed up the question of whether or not a cash buyer should get an appraisal when he said, “You are spending $265,000, spending another $350 for the appraisal seems like common sense to me.”

Indeed.

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