Low Appraisal, Financing Contingency, and the Deposit
Buyer Owen signs a standard offer to purchase a $620,000 two-family in Somerville. The offer states a $15,000 deposit, a 30-day mortgage contingency, and closing in 60 days. The seller counters at $635,000; Owen accepts. The parties sign a P&S that says the deposit is 'non-refundable after the mortgage contingency date except as required by law' and names the listing broker, Ridge Realty, as escrow agent. Owen applies to two lenders; one appraises the property at $580,000, the other denies the loan because of the appraisal. Owen's contract deadline is May 15; he notifies the seller on May 14 that he cannot obtain financing and terminates. The seller says Owen had 'plenty of money' and should have covered the $55,000 gap, refuses to release the deposit, and tells Ridge Realty to pay it to the seller. Ridge holds the $15,000.
1. Is Owen entitled to return of the deposit? Explain the analysis.
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The starting point is the mortgage-contingency clause, not the seller's view of Owen's finances. If Owen applied to lenders in good faith, cooperated with the process, and gave timely written notice before the May 15 deadline, he has exercised the contingency. The appraisal at $580,000 and the second lender's denial support his claim that he could not obtain the financing described in the contract. The seller's argument that Owen should have covered the $55,000 gap assumes a contractual obligation that is not stated; a buyer is not required to use cash reserves to cure a low appraisal unless the contract says so. The 'except as required by law' language does not override the contingency. Ridge should review the actual notice and contingency terms, but on these facts Owen has a strong claim to the deposit, subject to any specific P&S condition.
2. What should Ridge Realty do with the $15,000 while the parties dispute entitlement?
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Ridge Realty is an escrow agent and stakeholder, not an arbitrator. It should keep the $15,000 in the escrow account and not release it to the seller on the seller's unilateral demand. It should promptly notify both parties in writing that it has received conflicting demands and will hold the funds until it receives a written release signed by both parties or a court order. Ridge should not deduct its commission from the deposit or use the money for any business expense. If the parties will not resolve the dispute, the broker may need to seek legal advice about an interpleader or other court procedure. The broker's duty is to preserve the fund and avoid acting as a judge of who breached the contract. A prompt, neutral written notice protects both the parties and the broker.
3. Owen asks Ridge's agent for a 'quick appraisal' to challenge the lender's value. How should the agent respond?
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The agent should explain the difference between a comparative market analysis and an appraisal. A broker or salesperson may prepare a CMA using comparable sales, but may not call it an appraisal or issue an opinion of value for lending purposes. Massachusetts appraisals must be performed by state-licensed or certified appraisers, and the lender's appraisal is governed by its own engagement and appraisal standards. The agent can provide market data and suggest that Owen ask the lender about a reconsideration-of-value process or a second appraisal, but the agent should not pressure the appraiser or promise a specific value. The agent also should not suggest inflating the purchase price to make the loan work. The proper response is to separate brokerage opinion from appraisal and to direct the valuation dispute to the lender and a qualified appraiser.