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Deposits lost over home appraisals

February 22, 2008 12:00:00 AM PST
California home prices are falling, and so are the appraisals. If you place an offer on a home you want to buy, later you may find out that it won't appraise high enough for you to get a loan. But now there's a way to protect yourself.Most purchase contracts come from the California Association of Realtors, and those contracts have some protections for buyers as well as sellers. But new home builders and developers often have their own contracts, and if you don't read the fine print or have an expert take a look at it, then you might be in for a surprise that could cost you -- so buyer beware.

It looked like the perfect condo in the perfect area, and Denise Weaver was very excited to be buying her first home.

"I was super excited. And I was like, I love it, it's going to be so much fun to decorate," said Denise. "It wasn't 100 percent what I was looking for, but it was close enough."

Denise agreed on a price with the owner of the building - nearly $500,000 - and she plopped down a deposit of over $14,000. She then rounded up a lender who did an appraisal of the property, and that's when she hit a roadblock.

"I contact my bank, and I was all excited -- credit, of course is fine, all that sort of stuff," said Denise. "And the appraisal came back really low, and that really upset me and freaked me out -- like $80,000 below the asking [price]. That's a huge difference."

Even a second appraisal came back the same, so her bank wouldn't give her the loan she needed.

In about 90 percent of home purchase contracts in California there is a contingency built in allowing the buyer to back out of the deal if the buyer can't get financing, or the property doesn't appraise for the purchase price.

"If either of those eventualities doesn't come true, the buyer has the right to say to the seller, 'You know what, I'm sorry, my loan didn't make it appraise well, no harm no foul. I'm backing out, please give my deposit back,'" said real estate attorney Alan Wallace.

Wallace is a professor of law at Loyola Law School. He says Denise's contract unfortunately had no such provision. She is now in a battle to get her deposit back.

Home prices have been dropping for some time. At times like these, buyers must be very careful when they sign on the dotted line.

"Please consider putting contingencies in there if the purchase is contingent on your home inspection -- meaning that your home inspector says the home is in good condition; and if the property appraises out; and it's also contingent on you getting a loan," said Wallace.

That way you have a legal right to get your money back.

"Hire a lawyer before you even walk in the door," said Denise. "Have your broker checked out. Have everybody checked out, because at the end of the day, I'm doing this right now -- trying to get my money back."

As I mentioned earlier, new home builders tend to use their own contracts, so it's even more important to have an attorney or an experienced real estate agent look over your contract before you sign it.

Meantime, the owner of the building where Denise was trying to buy is now negotiating with her over the return of her deposit.

 

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