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My daughter is buying a house in Aurora CO (Denver). They made an offer for XX dollars or $3000 over appraisal. Lets say the offer is $100,000.
If the house appraises for $90,000, they buy it for $93,000. If it appraises for $190,000 they buy it for $100,000 (or $103,000 - that is not clear to me). I have not seen or heard of this process before, is this normal in a super hot market?
My daughter is buying a house in Aurora CO (Denver). They made an offer for XX dollars or $3000 over appraisal. Lets say the offer is $100,000.
If the house appraises for $90,000, they buy it for $93,000. If it appraises for $190,000 they buy it for $100,000 (or $103,000 - that is not clear to me). I have not seen or heard of this process before, is this normal in a super hot market?
Not sure how they got to $100 or $103... did you mean $193? in your second example?
No, actually I haven't heard of this happening, but I can see why it would in hot markets.
Interesting idea... I wonder if the appraiser knows about these terms.
Well, in multiple offer situations, where people offer over list price, some agents are asking buyers to confirm they will cover any shortfall between appraisal opinion and contract price.
This "$3000 over appraisal" may give a seller a bit of confidence, and not tie the buyer down for a mammoth hit in case of a bad appraisal.
I would want to see very very careful wording of an addendum, drafted by an attorney, though.
Not sure how they got to $100 or $103... did you mean $193? in your second example?
No, actually I haven't heard of this happening, but I can see why it would in hot markets.
Interesting idea... I wonder if the appraiser knows about these terms.
No. their offer which I used $100,000 is the cap. That is the most they will pay (although I am not sure if the plus $3,000 applies there.) thus, even if the house were to appraised for $400,000 the sale price would be maxed out at their cap (which is higher than the asking price, but the most they can afford) If it appraises below the offer, then the sale price is $3,000 over the appraisal.
It seems like a very buyer friendly offer process, but it also makes sense. If the house appraises for $90,000, they will not be able to get financing for more than that, if it appraises for more than the offer, they could not afford it.
The owner must be reasonably comfortable the house will appraise at or near the offer price otherwise I do not understand why they will accept it. In my non-professional review of recent comparable sales, I expect it will appraise below their offer.
I have never heard of this before, but then I have not been involved in many home sales in runaway markets. this is the eighth house they made an offer on. The others were all gone before their offer was submitted. This house they made the offer the day before they were accepting offers, also they sent the owners a letter telling them how much the loved the house. Not sure if that helped, she thinks it did. This house is ideal for her and is only 7 minutes from the school where she teaches. Their offer (cap) is around 15% over the asking price. It is probably pretty certain the house will not appraise for more then 15% over the asking price unless the realtor really messed up. In this instance, the owner must know where it will appraise because they had a deal previously, but the buyer backed out. The house is in an area that was sketchy, is better now and is excepted to continue getting better. The prior buyer may have decided it was too sketchy still. It is a primarily Hispanic neighborhood, that scares away some white buyers.
The appraiser is selected by the Owner, which I thought was a bit wonky.
I am not sure whether their other offers were the same structure. $3K over appraisal is a pittance compared to the price.
Perhaps it is unreasonable for the owners to expect to sell it above appraisal. It is a starter home and in that market, the people buying starter homes can barely afford them.
Ah - missed the part about the cap. Got it. It seems like a good attempt, in rapidly increasing markets, to at least base the offer price on some kind of solid basis. That's a good goal.
Quote:
If the house appraises for $90,000, they will not be able to get financing for more than that, if it appraises for more than the offer, they could not afford it.
The appraiser is selected by the Owner, which I thought was a bit wonky.
If they are getting financing, the bank will order their own appraisal... If this appraisal is separate from that, there is no guarantee the two appraisals will agree. There has to be some reconciliation for that in the contract.
If they are getting financing, the bank will order their own appraisal... If this appraisal is separate from that, there is no guarantee the two appraisals will agree. There has to be some reconciliation for that in the contract.
yes, that's my concern too. The bank won't care about the owner's appraisal but since they are the ones providing the financing, this could end up being a problem. I hope they still having a financing contingency in the agreement in case the numbers don't match up and the owner appraisal is significantly higher than the bank appraisal, which could contractually obligate them to buy for more than they can get financing for.
Even thought CO is typically not an attorney state when it comes to real estate closings, this might be an exception where it's worth having an attorney take a look at this contract.
I think the OP is wording it weirdly, but it appears to be an appraisal gap clause. They are essentially pre-negotiating the appraisal contingency. Most contracts have appraisal contingencies which still stands, but the buyer is agreeing to an appraisal gap coverage of $3,000, not to exceed a certain appraisal amount as they obviously wouldn't qualify for financing after a certain point.
I think the OP is wording it weirdly, but it appears to be an appraisal gap clause. They are essentially pre-negotiating the appraisal contingency. Most contracts have appraisal contingencies which still stands, but the buyer is agreeing to an appraisal gap coverage of $3,000, not to exceed a certain appraisal amount as they obviously wouldn't qualify for financing after a certain point.
Yes, that’s what it sounds like to me too. We were just buyers in a hot market who depended on financing and we wrote an appraisal gap clause into almost all our offers (happily not on the one we got though). It seemed very common in our area, where value is climbing rapidly and not every appraiser has their finger on the pulse, so to speak.
I would hesitate to say most contracts have an appraisal clause/contingency. We're back to "in my market" or "in my state".
Asking price is 90K.
they've offered 100K, with an appraisal cap of $3K over appraised value.
IF the Seller accepts, and the house actually appraises for $95K somehow, then the sales price will be amended to $98K. If it appraises for $110K, the price is still just $100K.
And the Bank lends on the $95K, so they actually have to come up with a weeeee little bit more than the $3K extra.
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