Three Contingencies and a Low Appraisal
Buyer Kenji signs a Michigan purchase agreement for 812 Halsey Avenue at $285,000, with $5,000 earnest money to be held by the listing broker. Two contingencies appear: (1) an inspection contingency allowing Buyer to terminate for any reason by written notice delivered within 10 days of acceptance, after which it is waived; and (2) a financing contingency stating the agreement is contingent on Buyer obtaining a first mortgage of $256,500 at the prevailing 30-year conventional rate, with a right to terminate by written notice within 21 days of acceptance and a refund of earnest money. Closing is set for 45 days out. On day 12 Buyer delivers a repair request for a $4,200 furnace; the seller refuses and Buyer says nothing further. On day 18 the appraisal comes in at $265,000, and the lender will lend 90% of appraised value. On day 20 Buyer delivers written notice terminating and demands the $5,000 back.
1. Is Buyer's day-12 repair request effective, and is Buyer still bound by the contract afterward?
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The request was untimely, the inspection contingency lapsed, and the contract remains fully binding.
- The contingency gave Buyer a window: terminate by written notice within 10 days, or the contingency is waived. Day 12 is outside that window, so the right to terminate on inspection grounds was already gone when the repair request was sent.
- A late repair request is simply a proposal to amend the contract. The seller's refusal leaves the original terms intact - price $285,000, property as-is with respect to the furnace, closing on day 45.
- Silence after the refusal does not revive anything. Buyer's only escape routes from day 12 forward are the remaining contingencies and the seller's default.
- Practical lesson: the inspection window and the financing window run on separate clocks, and blowing one does not affect the other.
2. Is Buyer entitled to the earnest money back under the financing contingency? Show the arithmetic and explain whether the seller's counterargument works.
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Yes - the specified loan cannot be obtained, and Buyer terminated inside the 21-day window.
- Lenders size the loan on the lesser of price or appraised value. Here that is $265,000, not $285,000.
- 90% of $265,000 = $238,500. The contract's required loan of $256,500 is $18,000 larger than the lender will fund at the agreed down payment.
- Because Buyer cannot obtain the $256,500 loan on the described terms, the financing contingency is triggered. Written notice was delivered on day 20, within the 21-day period, so the earnest money is refundable.
- Seller's argument - "he could get the loan by putting down more cash" - fails unless the contract says the buyer must increase his cash contribution. The contingency is written around a specific loan amount, not around "any financing whatsoever."
- Contrast: if the clause had required only "a loan of at least 80% of price" ($228,000), the $238,500 the lender will fund would satisfy it, Buyer would have to close, and the earnest money would be at risk.
3. The seller tells the broker holding the earnest money to release it to the seller. What must the broker do?
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Hold the funds; the broker is a stakeholder, not a judge.
- Earnest money must stay in the broker's trust account, uncommingled with operating funds, until one of two things happens: a written release signed by both parties, or a court order or binding arbitration award.
- The broker should notify both parties in writing that there is a dispute, state the amount held, and explain the release procedure and any time limits the brokerage's policy or the purchase agreement imposes.
- A seller's unilateral demand, or an agent's opinion about who is "right," is not authority to disburse. Paying out on one party's instruction can make the broker liable to the other and is a trust-account violation.
- If the parties will not agree, the broker may file an interpleader or follow the dispute-resolution provision in the purchase agreement; release of the funds then follows the judgment or award.