Moses Kagan on Real Estate

Just had a client get a counter back from a seller with the following language:

“Buyer has offered to purchase property over List Price. Appraisal is NOT a contingency of this sale. Buyer accepts responsibility between appraised value and sale price if any occurs.”

What does the seller mean? What he’s saying (in language which would probably not hold up in court, were a dispute ever to get that far) is:

• You have offered over the price I told my client the property was worth
• My client wants to accept your offer, because it’s the highest price
• But my client is worried the property won’t appraise and that your lender won’t lend you enough money to pay the contract price
• Therefore, I want you to agree to make up any difference between the agreed downpayment plus loan and the contract price by increasing the downpayment

Can you see the problem with this request? What happens if the purchase price was $400k and the appraisal comes in at $1? My client has to come up with $399,999 cash or he loses his deposit.

Now, obviously we don’t expect such a huge difference between contract and appraised price. But I have had appraisals miss by $100k before. Why? Because banks are required by recent changes to the regulatory regime to bid out all appraisal work and select the cheapest price. This means that the appraiser you get is often some guy who has never been to the neighborhood, doesn’t know the rents, doesn’t know the prices, etc.

So the above contract clause is basically asking me to placed my client’s financial fate in the hands of Steve the Appraiser who is driving in from deepest darkest Riverside County to tell us what an apartment building in Highland Park is worth. Probably not going to accept that, huh?