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.
Why not just tell ‘them’ that you couldnt get approved for a mortgage?
That financing condition is so open-ended and open to interpretation.
Even if you got approved for the mortgage, couldnt you still rescind the purchase contract by stating that you could not get approved for a mortgage based on the optimal amortization period you were looking for?
I decided not to buy a property earlier on this spring because I found a better one, and I informed the seller that I was not going to remove my financing condition because I couldnt get the mortgage I was looking for. Sure I was approved and all….
***Response…The rule of thumb (lawyers correct me if I’m wrong) is that you use your best efforts to get a mortgage and if it could be determined you could have gotten a mortgage under the terms of the agreement you could be held accountable for the sellers who may somehow discover you bought another property to pursue their remedies. Besides there is a simpler way. Make sure the protections you need are in the agreement.
I’m glad it worked out for you. Others have done as you have done and it has come back to bite them and when you are dealing with an intelligent seller who has the means to go after you, you are playing with fire. IMHO
You recommend that along with asking my realtor to do their CMA that you also have an appraisal done? Isn’t the appraisal almost based on the same factors as what you do for clients? And I thought lenders each had their own appraisers, so it doesn’t matter what the one you hired says. It’s been a long while since I bought a home. Maybe things have changed.
***You don’t necessarily have to get your own appraisal. The bank may require one. The issue would be more pressing if you a very well qualified buyer putting a substantial sum of money down. If the bank appraisal comes in lower you may still have to proceed with a straight financing clause. Your REALTORS cma should be an more pertinent especially in this market. It is not a guarantee that the seller could invoke specific performance. I’ll leave that to the legal minds. I’m just mentioning that it might be a possibility and if the seller is determined that possibility may increase.
Just goes to show that a smart seller can do better without a realtor. So can a buyer just know the market better than the other party. Back out of the deal it is better to be sued for 200k than definitely lose 200K. I may be out to lunch but when I put a condition it is an out if I change my mind for any reason. I once backed out of a deal as I did not like where the property line was and had a clause about a survey ?. Hard to remember as it was 12 to 15 years ago.
A smart buyer will gather info from a lot of sources Realtors included until they know the market. I always check mls and com free before a purchase. I have bought mls then seen fsbo lower and bought that one to
*** Just goes to show why smart buyers use a REALTOR. Not every contract or clause has the ability to just walk away. That assumption by a buyer could be extremely costly and painful. Anyways your assumption about changing your mind for any reason is in my opinion incorrect. However who am I to argue with one so wise.
Sheldon
“Back out of the deal it is better to be sued for 200k than definitely lose 200K.”
That makes no sense whatsoever. If you were smart, you wouldn’t have made that ridiculous offer to begin with.
“I may be out to lunch but when I put a condition it is an out if I change my mind for any reason.”
Yup, you’re definitely out to lunch. Unless you specifically add a “I’m dumb and can change my mind for no reason” condition, the other conditions are legally enforceable. I know that much hasn’t changed.
Abusing your financing condition? A prudent seller would ask for the actual letter/contact that proves that financing was attempted and declined by the lender. If you don’t have it, say goodbye to your goodfaith deposit.
wow it would be real tough to get the bank to deny financing. Just ask they will right you a letter saying you are denied. The banks work for you not the seller.
Anon
I bought a property $500,000 over the market value and the bank is forcing me to make good on this deal. Maybee I should lose all my assets just to make good on this lunchtime deal.
All joking aside the bankers are in on the deal and will work with you. When I was doing prebuilds I asked.
PS I made a fortune on prebuilds
Ages ago, we purchased a home that was “for sale by owner”. We put a financing clause in, but not knowing what we were doing, we worded it poorly as “buyer must be able to arrange a mortgage”.
It’s a good thing that we were able to get the mortgage and were happy with the purchase, because we were told later that this clause was satisfied as soon as we REQUESTED a mortgage from the bank, regardless of whether the mortgage was actually approved…..
I like the appraisal clause and will make sure I use it in our mext purchase. Thanks for the tip, Sheldon.
What about the house inspection clause? Every house that I’ve ever bought and had an inspection on has turned up something (sometimes something major, sometimes something minor) Couldn’t you back out on this clause using what was actually found instead of lying and saying that you couldn’t get a mortgage?
***It would depend on how the inspection conditions is written up and whether an inspection schedule was used or not.
Sheldon
Hi
I think market property market is very high in this time and prices are up and up it is not falling because this is a market level price.