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I am in the market to buy a house, so does my friend. Here is the situation he is in. He put in an offer to a REO and accepted. During the loan application, the appraisal came in $10K lower than the offer price. His realtor sent in request to reduce the price to appraisal price since he can't get the loan for the offering price. The bank rejected the offer and stated that he KNOWINGLY and WILLINGLY sent in an offer above the asking price (I am sure he just did what his realtor told him to do). His realtor is still trying to talk to the bank. If the bank still rejected, does my friend get his deposit back? If so, take how long? He is a bit worried.
The same as him, I don't have much experience. Since I am also in the market, I would like to know what is the best course of action to take. So I can be prepared. Thank you in advance.
Your friend needs to discuss this with his agent and review the bank addendum he signed to understand his options. Some banks will require the buyer to purchase at the accepted price even if the appraisal is lower, or lose the earnest money deposit. It's very important to read and understand the terms of the bank addendum before signing it.
It's been a while since I submitted an offer on an REO, but if I recall correctly, my offer still included language that stated something like:
"This offer is contigent upon upon Buyer obtaining a written loan commitment at XX%"
What does his purchase and sale contract say?
Edit: Just found an old Homepath addendum that states:
"If, despite the Purchaser’s diligent efforts, the Purchaser cannot obtain a mortgage loan commitment by the specified date, then either the Purchaser or the Seller may terminate this Agreement by giving written notice to the other party. The Purchaser’s notice must include a copy of the loan application, proof of the application date, and a copy of the denial letter from the prospective lender. In the event of a proper termination of this Agreement under this paragraph, the earnest money deposit shall be returned to the Purchaser and the parties shall have no further obligation to each other under this Agreement."
So again... as RJRCM stated... it really just comes down to what he signed.
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Edit: Just found an old Homepath addendum that states:
...
So again... as RJRCM stated... it really just comes down to what he signed.
Right, each bank has their own addendum and terms, and under what conditions earnest money may be returned.
I have seen some that are very tough on contingencies regarding appraisals. In some areas with a lot of competition for these homes, many buyers would bid over the listing price knowing that the appraisal was likely not going to meet it, and gambling that the bank would then lower the price. Some banks started restricting the appraisal contingency to combat this strategy.
Your friend needs to discuss this with his agent and review the bank addendum he signed to understand his options. Some banks will require the buyer to purchase at the accepted price even if the appraisal is lower, or lose the earnest money deposit. It's very important to read and understand the terms of the bank addendum before signing it.
I have yet to see a bank addendum like that, but it is believable to me that it could exist. I don't see how they could buy it in those circumstances. If it doesn't appraise, then you can't get your loan. Kiss your earnest money goodbye.
It's been a while since I submitted an offer on an REO, but if I recall correctly, my offer still included language that stated something like:
"This offer is contigent upon upon Buyer obtaining a written loan commitment at XX%"
What does his purchase and sale contract say?
Edit: Just found an old Homepath addendum that states:
"If, despite the Purchaser’s diligent efforts, the Purchaser cannot obtain a mortgage loan commitment by the specified date, then either the Purchaser or the Seller may terminate this Agreement by giving written notice to the other party. The Purchaser’s notice must include a copy of the loan application, proof of the application date, and a copy of the denial letter from the prospective lender. In the event of a proper termination of this Agreement under this paragraph, the earnest money deposit shall be returned to the Purchaser and the parties shall have no further obligation to each other under this Agreement."
So again... as RJRCM stated... it really just comes down to what he signed.
What you have there is what most contracts have, not just for REO's. It just makes the purchase contingent on the buyer being able to get a loan.
I have yet to see a bank addendum like that, but it is believable to me that it could exist. I don't see how they could buy it in those circumstances. If it doesn't appraise, then you can't get your loan. Kiss your earnest money goodbye.
In this case, the listing price is $8000 above the appraised price. So if the addendum is allowed, Bank can make a lot of money using REOs as baits. It doesn't sound right. Just my opinion. I am not a lawyer.
His addendum stated if he submitted all his loan paperwork in time and failed to get a loan, the deposit should be returned. WOW, his realtor is still trying to talk to the bank to see whether they can meet somewhere that would allow it to close with my friend bring in more cash. Then drinking coffee with another friend, a Suntrust mortgage broker, he told me many lenders don't like to finance a purchase like this even the purchaser brings a lot of cash to make up the gap. Any experience like this?
If the buyer brings in the cash to make up the difference, I don't see what the issue will be with the lender. They are lending based on the appraisal and the extra cash doesn't matter in the equation because it is not theirs.
I once submitted an offer for a client $15K over asking price because the asking price was about $25K below market value and my client really wanted it. The bank asked the buyer to show proof of funds for the difference between asking and list price in case it did not appraise. She did. But they sold it at list to a cash investor. Not sure if something hinky was going on or if the bank really prefers cash that much more than a loan.
In this case, the listing price is $8000 above the appraised price. So if the addendum is allowed, Bank can make a lot of money using REOs as baits. It doesn't sound right. Just my opinion. I am not a lawyer.
His addendum stated if he submitted all his loan paperwork in time and failed to get a loan, the deposit should be returned. WOW, his realtor is still trying to talk to the bank to see whether they can meet somewhere that would allow it to close with my friend bring in more cash. Then drinking coffee with another friend, a Suntrust mortgage broker, he told me many lenders don't like to finance a purchase like this even the purchaser brings a lot of cash to make up the gap. Any experience like this?
Like I said, no I haven't seen this. Always have your agent run a market analysis before making an offer. They are there to help you determine the value of a property so this won't happen.
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