Offers well above market price are the new normal! As real estate attorneys, we are reviewing more and more contracts with additional terms or addenda attempting to resolve any potential appraisal issues related to the “Gap”.
The gap can be easily be defined as the difference between the appraisal value and the purchase price. There has been an increase in the number of sellers that want a buyer to agree that if an appraisal comes in “low”, the buyer will make up the difference, (the “Gap”), and come up with the additional cash to close at the agreed-upon purchase price, so it is important to consider how the Gap will impact the closing.
Generally speaking, even if an appraisal contingency isn’t specifically laid out in an appraisal rider, the terms of the buyer’s loan approval may require that the property appraise for a certain dollar value. It is important to ensure that your client minds the Gap, particularly when your contract is contingent on financing!
Here are some factors to consider:
1. How much of a Gap between the purchase price and appraisal value is the buyer willing to tolerate? For example, would the buyer still purchase the property if it appraised for $10,000.00 less than the purchase price? What about if it was $20,000, or even $50,000?
2. Does your client want to renegotiate a purchase price, or want the unilateral right to terminate the contract if the Gap is too large? Does the seller want to be able to re-negotiate the purchase price or release the buyer from the contract?
3. What timeframe does this information need to be obtained in? It is not unusual for appraisals to come in close to the closing date! Ensuring all parties are on the same page regarding the timeline is essential to keep closing as scheduled.
A buyer must consider all possible outcomes, especially in a market where it is not unusual for properties to sell for several thousands of dollars over list price. This is equally important for a seller to consider, delays in obtaining appraisal information or establishing a final sales price will impact a seller’s ability to schedule their move or their subsequent purchase.
It is imperative that any language that is added to the contract is drafted carefully to ensure it produces the parties’ desired outcome. Specifying the Gap amount, and identifying a specific outcome should the Gap amount exceed the buyer’s tolerance and a timeframe for decision making will minimize closings issues related to appraisals.
Whether you represent a buyer or seller, if there is going to be financing involved in your transaction the appraisal value is something to consider. Preparing your client for these potential measures may help protect your hard-earned relationship while facilitating a smooth closing process.
Sincerely,
Natasha Selvaraj, Esq. gperez@berlinpatten.com
Berlin Patten Ebling, PLLC
This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.
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