Contingency Issue: Increased Down Payment before Low Appraisal

[Michael Archard]

Hi BP,

I have an interesting legal dilemma here. I listed a flip for sale a few months back and accepted an offer (over asking) from a very strong conventional loan buyer. Unfortunately the appraisal came back low and the buyer walked away citing her mortgage contingency (there was no appraisal contingency). What's interesting is that the buyer had already told us she decided to increase her down payment before the appraisal came back citing "the final loan application was for a lower loan amount than the P&S loan value."

My question is does anyone think I should pursue the entire deposit via litigation? I am currently holding the deposit hoping for a small settlement outside of court and have already sold and closed on the the condo to another buyer (at a loss). A side note is that my day job as an engineering consultant for arbitration/litigation disputes puts my legal risk tolerance higher than most, but I'm trying to avoid litigation unless it makes sense. The buyer is currently balking at any and all settlement offers (we are only asking for $5k of her $48k deposit). 

I know I could not make the buyer put additional cash into the deal, but we structured the PnS to allow the buyer to restructure the loan (ie., the buyer was not tied to the original loan terms and could decrease the down payment to avoid denial of financing). In our negotiations, the lender confirmed the buyer could have restructured the loan to decrease her down payment from 10% to the minimum 3% allowed, but there was still about a $5k delta (original loan was $432k and restructured loan at 3% down would have been $427K). The situation points to the the buyer likely put in an additional 5%-10% downpayment for more favorable loan terms prior to the appraisal (see Buyer X first and second offers below). 

The elephant in the room was the buyer changed her mind and wanted out as soon as the appraisal came back low. She was not willing to renegotiate or appeal the appraisal via Reconsideration of Value. She had a very inexperienced agent and closing attorney which did not help us keep the deal together. The buyers agent actually pushed back when we asked for an official loan denial letter, which rose red flags making it look like they had to ask the lender to be denied.  

A few nuances here related to the numbers:

• List Price: $449k
• First Offer Received Buyer X: $465k w/ $95k down (with appraisal continency) 
  
• Final Accepted Offer from Buyer X: $480k w/ $48k down (appraisal contingency removed)
• Bad Appraisal: $440k (should have been appealed with ROV due to errors but buyer declined; average age of comps was 11.5 months and no inflation was added to adjust values, also appraiser used incorrectly small square footage)

• Buyer's Original 90LTV Loan: $432k ($480k w/ $48k down)
• Buyer's "Final" Loan Application: ???? unknown
• Buyer's Possible 97LTV Loan Restructured: ($427k w/ $13k down)

It is my understanding if the buyer had committed to a new loan application with a loan amount less than $427k, prior to the appraisal coming in, she could not have obtained a loan denial from the lender in good faith. Please let me know if I can elaborate or if I'm missing anything. As I mentioned we are trying to settle outside of court, but given the way things are going (and my professional experience) I'm not afraid to go the distance if needed. 

Thanks!