"subject to" appraisal clause

(Duplex in TX - contracted price at 179K w/ 20% down). I’m supposed to be closing on the 25th of this month (this Tuesday), and today, I just found out the appraisal came in at 167K.

  1. When purchasing a property, does the lender have a choice of doing a drive-by or full appraisal review? ( I have an issue with receiving the appraisal 1 business day before close of escrow).

  2. I’m positive cash flow based on what the “competitive” rental rates are according to the Property Mgr.

  3. How important is it to have the appraisal come in close to the asking price of the home? (I’ve reviewed the last two months worth of “appraisal” search on reiclub.com and I see both pro’s and con’s to this).

  4. Is there a ratio / percentage on what is an acceptable difference between appraisal price and the contracted price?

  5. If my contract doesn’t contain a, “subject to” appraisal clause built in, do I have any grounds of bringing the contract back to negotiations?

Thank you for any insight you may be able to offer. I just want to know that I made a good value-based offer based on the true value of the appraised value.


From what you’ve said, it looks to me like this is a TERRIBLE deal. Buying a property at higher than market value is a very poor business strategy. Market value by definition would be the average selling price for the property. So, why would you even consider buying this property if it is overpriced? Why not just buy another property BELOW market price? If market price is the average selling price, surely you could do a little work and find one better than average!

Having said all that, appraisals do not always represent market value. That’s why I always suggest that new investors look at 100 houses in their target area before they begin investing. By doing so, you will KNOW the value of a property based on your experience.

I am in the process of buying a 4 unit building for $75,000. A year ago, it appraised at $110,000. The monthly gross rents are 2% of the purchase price and needless to say the propery has an excellent positive cash flow. I’m buying it at 68% of previous appraisal which is also corresponds with my personal KNOWLEDGE of property values. The appraisal came back at $65,000 by the comp sales method and $110,000 by the income method. The bank is accepting the $65,000 comp sales number. I called the bank and asked what had happened - this had to be a mistake. Well to make a long story short, the appraiser said that recent sales of similar apartment buildings had declined in price and that was the basis of the comp sales figure. Guess who bought those other buildings at a hugh discount - that’s right I DID! The fact that I bought those buildings in the last couple of months and live in a relatively small community sabotaged my own appraisal!!! So, in this case, I’m still buying the property because the real market value is $110,000 based on comparable sales (excluding the ones I bought) and from my personal KNOWLEDGE of my market.

I’m also a little concerned in your post that you don’t personally know what the cash flow is. I would never buy a property on someone else’s word, especially someone who has a vested interest in the number - like a potential property manager. You definitely need to do your own research and cash flow analysis to be sure that the numbers will work.

Good Luck,


Your contract is probably contingent on third party financing. I went through something similar recently, but the loan was going to fall through because of my credit score. Read your contract. If it’s the TREC contract, the contingency would be mentioned on the first page, and then there would also be an attached Third Party Financing Addendum. But If you read the addendum, you have to notify the seller within a certain timeframe that you were not able to get the financing. If the closing date is the 25th, I’m assuming that timeframe has probably already elapsed, so you may end up having to give the seller your earnest money if the deal does not go through.

Here’s the part I don’t have any experience with, but this is the avenues I would take. If you think the appraiser was wrong, I would talk to the lender about this, and ask for a second appraiser’s opinion. If the appraiser was correct, I’d try to renegotiate with the seller, as the contract you have now is not going to work. Use the appraisal as leverage. Make sure to take propertymanager’s advice and find the acutal rents and the actual cash flow before starting negotiations. Again I don’t have any experience with an appraisal coming in low, so maybe someone else more knowledgeable about this can chime in.

Good luck, and let us know what happens.

Thank you for both of your guys advice. You hit this issue on the head.

  1. TravisTX - you’re right about the Third Party Financing Addendum. I am fully qualified to purchase the property, that’s why it went through up to this point. I had a two week option period that ended on the 13th. I’m pissed that I just received the appraisal number from the lender on Friday (21st) - and it was just a verbal number. Who knows if it was just a drive-by or a ful appraisal.

1a) Isn’t this short notice on the appraisal either negligent or just plain f***ed up!?!

2)PropertyManager - I know I’m positive cash flow based on the numbers adding up. Total rents are 1500$ each side and gross operating expenses are 1420$. (including PITI + umbrella policy + property mgr). What I didn’t factor in is a vacancy rate. (Dohhhh)!!! I’m playing in the red yearly, aren’t I?

  1. I am only going to get better at this! I know!! I thought I was on top of this entire transaction but the damn appraisal aspect snuck by me like the bird flu. I’m afraid I don’t have any chips to even wish for negotiations to come out successful. I came in with 4K of earnest money thinking that this would only solidify my offer. I don’t want to lose this.


Appraisers like other groups have both good and bad ones.

I will always know what the value should be before a contract is signed and never rely
on an appraisers opinion. I have had to pay for a second appraisal many times. I have
had as much as a 50% difference in appraised value. Not long ago a bank ordered an
appraisal that came in at $800,000 on a $1,500,000 property. I was able to show the bank
two previous appraisals of $1,500,000 and plenty of comps. I insisted that they order three
additional appraisals, which came back at $1,550,000, $1,575,000 and $1,600,00.

It doesn’t seem right to have to spend the extra money, but you will find that there
Are a lot of things in this business that doesn’t seem right.

I had an appraiser come in at half of what I contracted for once, I was able to determine that
He had also made an offer on this property for more than my contract price and was not accepted
because of his contingencies. I do not know what he does today, but I know that I caused him
to lose his best accounts.

Hold your head up high and know that you will have to work around a lot of idiots.

If your appraiser is right you may be better off losing the $4,000 than closing the deal.