I recently had a client referred to me who had put an offer on a million dollar+ property being sold privately. They put their offer on the property with the hope that they would sell their own property and everything would be hunky dory. The only conditions were a standard financing clause and the usual inspection.
It turned out that the seller was asking $200,000 more now, than when their listing had expired on the MLS. The buyers thought that they were getting a steal of a deal at $200,000 below their current asking price.
When I met with them to review the value of their property and the current market conditions their eyes got a little wider, that’s when they asked for some information on the property they were buying. Since they weren’t being represented by someone else I could put my two cents in and say “are you crazy? Nobody wanted it at the previous price on MLS after 6 months and the market has not improved.”
The long and the short of it is the comparable sales were not close to their offer price, and the bank’s appraisal was significantly less then their offer price, which meant they would have to cover the significant shortfall in cash.
I asked what conditions they had on their offer: they didn’t know. I asked who drafted the offer: the meek reply was a lawyer assisted them with an Alberta Real Estate Association purchase contract.
So what’s the big deal? If you have experience in these matters you’d know that even though the property doesn’t appraise out they could still qualify for the mortgage, especially with their income and equity. Therefore, even though the appraisal was significantly lower than the agreed to purchase price, their financing condition did not relieve them from their contractual commitment to purchase the property.
A better protection in a case like this is an appraisal condition that gives the buyer the option whether or not to proceed if the value of the appraisal is lower than the purchase price. Given the current market it should not be hard to get an appraisal for higher then the purchase price since the comparables taken are generally from a period when the market was performing better.
