Here’s the
current state of the market… I listed two homes this month, they were on the
market a total of six days (combined), drew 86 total showings and 17 total
offers. All 17 offers over list price,
and eight modified or waived the appraisal clause.
With both of
these properties, our top offers were clearly beyond where these homes were
going to appraise. And since I represent
the sellers, and it’s my job to get them the best price and terms possible,
these deals basically now live and die with what buyers choose to do with the
appraisal clause.
In short,
any financed buyer is going to need a formal property appraisal. And under traditional lending guidelines, the
buyer’s lender is going to offer financing to that buyer based on the LOWER of
the contract price or the appraised value.
Let me
explain how this works.
Let’s say a
property is listed for $285,000. But in
our supercharged multiple-offer environment, a motivated buyer chooses to offer $300,000
for the home. If the buyer plans on
making a 10% down payment, that’s a $270,000 loan with a $30,000 down payment.
But let’s
say the appraiser then does his site visit, compares the home to others that
have sold in the area, and comes back with an appraised value of $290,000. That means the lender is only going to loan
90% of $290,000 (the appraised value) instead of 90% of $300,000 (contract
price).
90% of
$290,000 is $261,000… but since the contract price is $300,000, that buyer
would now need to bring in $39,000 instead of $30,000 for a down payment. Is the buyer willing to do that? And does the buyer have the means to do so?
This is the
stumbling block for many transactions right now, and it’s the first topic of
conversation between agents when it comes to evaluating offers.
In the “old”
days, before Denver became what it is today, a low appraisal was bad news for the
seller, because 99% of the time the buyer would ask the seller to lower the
contract price to match the appraisal, and with no other offers or buyers on
the horizon, sellers would often capitulate.
Today, however,
when a property fails to appraise, 99% of the time the seller is going to say “tough
luck” (or some other variation of toughness) and the buyer is going to have to
figure out how to come up with the money or lose the house.
The purchase
contract states that any financed buyer has the right to get an appraisal. The contract also further states that if the
property fails to appraise, the buyer has the right to terminate the
contract.
Of course,
all contract clauses can be modified by mutual agreement, and that’s where motivated
buyers obtain separation from the pack.
In this
environment, financed buyers basically have three choices when it comes to the
appraisal clause:
WAIVE THE APPRAISAL CLAUSE – the most
motivated and serious buyers will waive the appraisal clause up front. This basically says “no matter what the
property appraises for, I am willing to proceed with the contract, and make up
the extra down payment required by the lender from my own funds if it fails to
appraise.” If you were selling and wanted
a committed buyer, wouldn’t this be the offer you choose? This type of offer is even more impactful
when it shows up with a bank statement showing the buyer has the cash to back
up his words.
MODIFY THE APPRAISAL CLAUSE – modifying
the appraisal clause says, up front, that if the property fails to appraise for
the contract price, the buyer agrees to pay some fixed amount ($5,000… $8,000…
$15,000… whatever number fits the buyer’s tolerance for a shortfall) above the
appraised value, not to exceed the contract price. In our example of a $300,000 contract price, let’s
say the buyer agreed in the original offer to pay $8,000 above the appraised
value, not to exceed the contract price.
If the property appraises at $290,000, all parties have agreed up front
that the final contract price will be $298,000, with the buyer bringing in any
extra funds required by the lender to cover the shortfall.
KEEP THE APPRAISAL CLAUSE – by not
addressing the appraisal clause, the buyer is essentially saying if the
property fails to appraise, the deal is toast unless the seller lowers the
price to match the appraised value. In
this market, that’s not likely to happen.
For sellers
looking at anywhere from three to 12 offers on any good piece of real estate,
the appraisal clause is a critical determining factor in which offer is going
to be chosen.
As someone
who lists a fair number of homes, this is where the rubber meets the road when it comes
to evaluating offers. Show me a buyer
willing to write an offer representative of the market, with the fortitude to
modify or waive the appraisal clause, and I’ll show you someone who is going to
be under contract soon.
Keep the appraisal
clause intact, and I’ll show you a buyer who is going to see his contracts
landing in the circular file again and again until all the serious buyers have
come through. Then, when prices are higher
and the competition finally thins, it will be your turn, assuming you have the
stomach to deal with months of rejection and you’re okay with paying five to 10
percent more than you would have paid by taking more committed action
sooner.
Which brings
us back to a simple truth. Buying a home
is serious business, and it’s your job to be seriously educated. If you believe in the law of supply and
demand, that higher prices are inevitable when every home is drawing multiple
offers and there is a 31-year low in inventory, that unemployment of 3.2% in
the metro area and 270 people per day moving to Colorado will continue to positively impact the market… then it only makes sense that the smart move is to do
whatever it takes to buy sooner rather than later.
