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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. I am not sure what the confusion is here.
Lets dissect the example.
Offer price = $100,000. That is the highest price they will pay not matter what. The most the house will sell for is $100,000. It could appraise for $1,000,000,000 and the sale price will be $100,000 (or possibly $103,000 I am not sure how the $3,000 fits in in that instance. That is the cap. It is like a GMP in a construction contract if you know what that is.
If the house appraises for $190,000 or for $250,000 or $800,000 in this example, the sale price is still $100,000. That is like any other offer. If I agree to sell my house for $750,000 and it ultimately appraises for $1.2 million, that is too bad for me.
However this deal has a twist. Normally if the house fails to appraise for the offer amount, financing fails and the deal ends. Here if the house appraises for less, the price goes down and the deal is still there. Subject to the $3000 "over appraisal" agreement. So effectively the offer that was accepted is for $100,000 or $3,000 over appraisal, whichever is less. (Although it if appraises for exactly $100,000, the seller may still get the $3,000 that is not clear and does not really matter).
If the house appraises for 97,0000, the price is $100,000. If the house appraises for anything less than $97,000 then the sale price is less than $100,000. It is whatever the appraisal is, plus $3,000, as long as it is below the offer cap.
The actual numbers are much larger, I am just using $100,000 because it is a nice round number and because I do not want some crafty person to use this information to figure out which house it is and interfere with the deal to profit on it.
Apparently, since this is so confusing, it is not at all commonplace. That is what I was wondering. This must be an unusual concept in real estate and that is why it is so difficult to grab hold of. I work with GMP contracts every day, so the concept is simple to me, but sometimes we forget this concept is not readily grab-able to people who do not deal with it daily. That is likely why I am getting frustrated and puzzled by people not understanding this, or trying to say I meant something else. To me it is as common a concept as buying a coke at McDonalds., but I am realizing for people not involved in complex construction matters, the concept of a GMP may be completely foreign.
(GMP - Guaranteed Maximum Price btw. It is a type of delivery system usually used in very large construction contracts. I have never thought of it as a difficult or foreign concept, but that happens when you do something for 30 years. You start assuming the commonplace is common knowledge or easy to fathom for everyone.)
BTW, their offer was 12% over the asking price. That also probably explains why the owner is willing to do this deal. The odds are pretty good the appraisal will fall someplace between the asking price and the offer amount.
However if they had not submitted their offer early, they would have been beat out. Slightly higher offers came in the next day (although they did not have the financing pre-approved). They submitted their offer the day before the official date for accepting offers and the owner accepted right away. They also sent the owner a letter about how much they loved the house and wanted to live there. This may have had an impact on the owner accepting their offer immediately.
There are a lot of owner oriented other terms. The owner gets to stay over for three weeks after the close with no discount or rent back. The sale is as is (they will of course have an inspection). Owner chooses the appraiser - I am not sure how that works with the bank providing the loan, but I know there is only one appraisal. Both the appraisal and the inspection are crazy expensive in my mind ($800 and $600 respectively). The market is crazy so inspector and appraiser can pretty much charge whatever they want. If you don't want them, you can wait six weeks for someone who is $100 cheaper. They also had to show proof that they were pre-approved for an loan for the amount of the offer and that they have the required down payment sitting in their bank account. If they do not do the deal, the $3,000 is lost.
When we bought our first house it was in a buyers market. Our offer required them to pay rent for staying over, required them to include a number of furniture items in the deal, required certain repairs, had multiple conditions (including new plumbing) and contingencies and the owner carried back half of the down payment required by the bank. It is amazing how completely opposite the market goes. We did not have to pay anything to hold the offer, I think we gave them some nominal amount to serve as consideration. Our offer was $50,000 below the $225,000 asking price. (Our current house we bought for $1 so there was no negotiation).
Kind of a side note, when a house is listed with a specific date for accepting offers, and the owner accepts an offer before that date - doesn't that tick off realtor representing other buyers?
BTW, their offer was 12% over the asking price. That also probably explains why the owner is willing to do this deal. The odds are pretty good the appraisal will fall someplace between the asking price and the offer amount.
However if they had not submitted their offer early, they would have been beat out. Slightly higher offers came in the next day (although they did not have the financing pre-approved). They submitted their offer the day before the official date for accepting offers and the owner accepted right away. They also sent the owner a letter about how much they loved the house and wanted to live there. This may have had an impact on the owner accepting their offer immediately.
There are a lot of owner oriented other terms. The owner gets to stay over for three weeks after the close with no discount or rent back. The sale is as is (they will of course have an inspection). Owner chooses the appraiser - I am not sure how that works with the bank providing the loan, but I know there is only one appraisal. Both the appraisal and the inspection are crazy expensive in my mind ($800 and $600 respectively). The market is crazy so inspector and appraiser can pretty much charge whatever they want. If you don't want them, you can wait six weeks for someone who is $100 cheaper. They also had to show proof that they were pre-approved for an loan for the amount of the offer and that they have the required down payment sitting in their bank account. If they do not do the deal, the $3,000 is lost.
When we bought our first house it was in a buyers market. Our offer required them to pay rent for staying over, required them to include a number of furniture items in the deal, required certain repairs, had multiple conditions (including new plumbing) and contingencies and the owner carried back half of the down payment required by the bank. It is amazing how completely opposite the market goes. We did not have to pay anything to hold the offer, I think we gave them some nominal amount to serve as consideration. Our offer was $50,000 below the $225,000 asking price. (Our current house we bought for $1 so there was no negotiation).
Kind of a side note, when a house is listed with a specific date for accepting offers, and the owner accepts an offer before that date - doesn't that tick off realtor representing other buyers?
Not really. It is the sellers' decision, and really just another day in a wild world. I tell people that they need to write if they want it delivered. Waiting to the deadline is unwise, because it happens.
Resilience is the watchword today.
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So what is a standard "due diligence fee"? That's not a fee in the jurisdictions I'm familiar with.
And yes, I understand what no contingencies means, I was just asking about the consequences of a house not appraising when a mortgage is involved. And in very few places (any?) is a seller obligated to come down on the contract price if the house doesn't appraise, that's not part of a standard financing contingency
Yes, of course prospective buyers should have "an idea" of the value. But obviously that's a subjective opinion and my idea of the value may not be the same as the mortgage lender's idea.
It should be an "informed opinion." A buyer, seller, their respective agents, and the appraiser, all have roughly the same information at their disposal. How objective one chooses to be is when looking at this data? That can change things. Some people will look at the house down the block and recognize that it sold for more money since it has a new roof, HVAC, and sits on a more desirable lot. Some will look at it and say, "Old Man Crandall sold his for $400K, I deserve that too!"
Quote:
Originally Posted by Coldjensens
I am an attorney. So she can have an attorney look at it for free. Not in Colorado, and not in residential real estate but I know contracts better than most attorneys.
I have never heard of this kid of deal, that s why I asked. I have had no involvement in residential real estate in decades. Maybe this is something new.
However my daughter is both fiercely independent and extremely stubborn. I did not even know they were looking at a house until she told me they had made an offer. Maybe this is something new.
The problem with the attorney review, while it is a good idea, is they had to provide a $3000 good faith deposit for the deal. Add another $3000 for an attorney to review the contract and answer some questions and they might not e able to afford the house a anymore. They are buying close to their maximum- (There is no need for judgmental comments here, thank you. Young people starting out make their decisions and they either work out or not. We nearly had to sell our shoes to gt into our first house, We absolutely could not afford it. We struggled for a long time, but we made out like bandits when we sold it (paid 175,000 sold it after 9 years for $757,000).
I'd be interested to know what that means. I understand what "good faith" means, but no idea what it means in relation to that contract.
As a layperson, it sounds like the contingency in their offer is designed to protect their deposit, and preserve the deal, in case the appraisal falls wildly short. Meaning, without that clause, if the appraisal was $90K, and they backed out, would they lose their deposit on the grounds that they didn't make the offer in good faith, that they made a really high offer hoping that they would later strongarm the buyer down to appraisal value and took the property off the market for that time, etc...
The $3,000 deposit shows the offer is made in good faith i.e. it is a serious offer they intend to go through with. If they do not do the deal, the lose it. It also shows they have the money to pay in excess of the appraisal and still have the required down payment available. They call it different things in different locations around the country. My daughter called it a good faith deposit, which had to come from her realtor. So I used the terminology. Someplace might call it an offer grantee, simply a deposit, in Southern California they had a different term for it that i do not remember.
Not really. It is the sellers' decision, and really just another day in a wild world. I tell people that they need to write if they want it delivered. Waiting to the deadline is unwise, because it happens.
Resilience is the watchword today.
..
Real estate must be a frustrating business, at lease for the first few years until you get accustomed to the roller coaster or learn not to celebrate emotionally until the commission is in the bank.
yes they are, which is why it matters who the Buyer chooses as their lender, and how that lender goes about choosing an appraiser.
Still, at the end, nothing prohibited Buyer A - who agreed to pay $30K and who seems also "hollered" about that deficient appraisal - from paying $30K more or so in cash. Or restructuring their loan.
Imagine if the contract price was $300K, and he was paying $300K with 20% down. He figured to have a $60K downpayment and borrow $240K. So long as he was QUALIFIED for the payment and a slight variation in standards, he could have paid 5% down, or 13.5K + the 30K extra. His downpayment is actually smaller. He may not even pay a higher rate (it's a conventional 30 year either way). He would pay some mortgage insurance, but might easily refinance in 1 year.
True, they could have made up the difference, although they were already over the original asking price and didn't have more cash handy. Since there were multiple offers we just moved on, but they really liked the house and I felt sort of bad for them.
I don't get it why the seller would ever want to accept a cap on the selling price. who in his own mind would sell a house for 100k if it was appraised more than that or way more.
There's something wrong here, perhaps with the house. I would definitely involve a lawyer.
I don't get it why the seller would ever want to accept a cap on the selling price. who in his own mind would sell a house for 100k if it was appraised more than that or way more.
There's something wrong here, perhaps with the house. I would definitely involve a lawyer.
Every offer has a cap. If I offer 400K for a house and you accept and it appraises for 425K, it’s good luck for me and bad luck for you because you already accepted my “capped” offer of 400.
The $3,000 deposit shows the offer is made in good faith i.e. it is a serious offer they intend to go through with. If they do not do the deal, the lose it. It also shows they have the money to pay in excess of the appraisal and still have the required down payment available. They call it different things in different locations around the country. My daughter called it a good faith deposit, which had to come from her realtor. So I used the terminology. Someplace might call it an offer grantee, simply a deposit, in Southern California they had a different term for it that i do not remember.
by now, have you actually read her exact contract that's been executed?
also, I cannot imagine a scenario where the closing purchase price > contract price because the appraisal came in high. But your post saying their 100K contract price can become 103K sure reads that way
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