First Home Purchase - Disagreement on Appraisal Contingency

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dcw213
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First Home Purchase - Disagreement on Appraisal Contingency

Post by dcw213 » Thu Jul 25, 2019 8:18 am

I am in an unexpected situation in going through my first home purchase. We made an offer on a house at list price very soon after it went on market and it was accepted quickly. We are in attorney review now. We went through inspection and settled on some terms for repairing defects etc. Unexpectedly the sellers attorney rejected our request for an appraisal contingency, citing the fact that I am putting more than 20% down as a reason that I will still get my desired mortgage product if the property appraises low. My attorney requested that the deal is contingent on an appraisal of at least purchase price. Seller attorney countered with at least purchase price less $25K.

My agent and attorney say that this request is extremely standard as a buyer protection and have never seen a rejection like this. Curious if this community knows if the contingency my attorney is seeking is indeed standard and something to be pushed for or if the sellers terms are reasonable. Since this property did not sit on market for long I am less inclined to quibble around the edges of the transaction but I have never done this before. Any thoughts would be greatly appreciated.

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8foot7
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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by 8foot7 » Thu Jul 25, 2019 8:23 am

Personally I would withdraw the offer. (I guess technically you don’t need to since they didn’t accept it but with attorneys involved I’d be crystal clear.) your contingency is very standard. their requests are odd; not necessarily not accepting offers with contingencies, which is fairly common, but the oddball is the 25% less one.

Sellers are clearly concerned with appraisal. Your amount of down payment should not affect the value of their house. The contingency of 25% less than appraisal is laughable. Why would you proceed with a transaction when an appraiser thinks your purchase price is 20% too high?

Walk away.

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dcw213
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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by dcw213 » Thu Jul 25, 2019 8:27 am

Thanks for the feedback. Just to clarify, their counter proposal was 25K less not 25%. This amounts to about 4%

daheld
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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by daheld » Thu Jul 25, 2019 8:28 am

8foot7 wrote:
Thu Jul 25, 2019 8:23 am
Personally I would withdraw the offer. (I guess technically you don’t need to since they didn’t accept it but with attorneys involved I’d be crystal clear.) your contingency is very standard. their requests are odd; not necessarily not accepting offers with contingencies, which is fairly common, but the oddball is the 25% less one.

Sellers are clearly concerned with appraisal. Your amount of down payment should not affect the value of their house. The contingency of 25% less than appraisal is laughable. Why would you proceed with a transaction when an appraiser thinks your purchase price is 20% too high?

Walk away.
I agree with this. I live in a relatively LCOL area in flyover country, and this is by no means standard here. I understand it might be in a HCOL area. I would not be comfortable with their appraisal contingency and would not agree to it.

Admiral
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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by Admiral » Thu Jul 25, 2019 8:31 am

Who is demanding the appraisal? Your mortgage company? Are you pre-approved for the loan amount?

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dcw213
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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by dcw213 » Thu Jul 25, 2019 8:36 am

Admiral wrote:
Thu Jul 25, 2019 8:31 am
Who is demanding the appraisal? Your mortgage company? Are you pre-approved for the loan amount?
Yes I have a pre approval but the lender requires the appraisal. My attorney recommended adding the appraisal contingency citing it as a standard buyer protection. I don’t expect appraisal issues. While the protection would be nice, I don’t know how much to push.

Userdc
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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by Userdc » Thu Jul 25, 2019 8:36 am

This seems like a reasonable ask from the seller. You’ve agreed on the price and they don’t want to give you a free option to get cold feet and force them to find another buyer or try to renegotiate if the appraisal comes in slightly low.

Appraisals are a wild card and can come in all over the place. 5 different appraisers will give you 5 different values.

The appraisal contingency is really there for those that are down payment constrained ie, do not have the ability to close unless they can get a certain amount of financing. If you have the wiggle room to put down a slightly larger down payment, I think the sales price minus $25k is plenty fair.

Next time don’t let on that you are putting more than 20% down!
Last edited by Userdc on Thu Jul 25, 2019 8:38 am, edited 1 time in total.

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hand
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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by hand » Thu Jul 25, 2019 8:37 am

Not standard language, but I would not be particularly worried about the appraisal + $25k language assuming 1) I was comfortable in my valuation of the property and 2) I was certain that I could get preferred financing even if appraisal came in low.

FYI: The opposing attorney's argument that this shouldn't matter because you're putting 20% down is wrong - if property appraises high, your 20% will be 19% or less and while you'll still get financing, intrest rate likely to be higher.

As a compromise, suggest seller rebates for 20% of underappraisal to cover potential increased financing costs.

This is a legitimate negotiation point, I would absolutely not walk simply because of the ask.

bluebolt
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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by bluebolt » Thu Jul 25, 2019 8:45 am

Depends on how much of a seller's market you're in and how much you want the home. Around here, offers with no inspection, no financing and no appraisal contingencies are not uncommon.

Agree that if you're comfortable with the valuation/price you're paying, the appraisal only matters to the extent that you could not cover the difference of a larger down payment.

Bortky
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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by Bortky » Thu Jul 25, 2019 8:47 am

dcw213 wrote:
Thu Jul 25, 2019 8:18 am
Citing the fact that I am putting more than 20% down as a reason that I will still get my desired mortgage product if the property appraises low.
That's not necessarily true. A bank will only give a mortgage up to the appraised value less the 20% down payment.

If the house appraised for 25k less than the purchase price, it would either be up to you to put in an extra 25k, the seller to reduce the cost by 25k, or some combination of the two.

If you are purchasing a house for 500k and you are putting 25% down (125k) but the house appraises for 475k, the bank will treat it like you are only putting 21% down on a 475k house (100k down payment and 25k to make up the difference between the purchase price and appraisal) instead of 25% on a 500k house.

chevca
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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by chevca » Thu Jul 25, 2019 8:50 am

Do you want the house? If so, agree to the seller version and move on. The appraisal thing is just for mortgage purposes at this point anyway. If you're putting 20% or more down, there's not much to worry about unless the appraisal went really weird.

rascott
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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by rascott » Thu Jul 25, 2019 8:52 am

dcw213 wrote:
Thu Jul 25, 2019 8:18 am
I am in an unexpected situation in going through my first home purchase. We made an offer on a house at list price very soon after it went on market and it was accepted quickly. We are in attorney review now. We went through inspection and settled on some terms for repairing defects etc. Unexpectedly the sellers attorney rejected our request for an appraisal contingency, citing the fact that I am putting more than 20% down as a reason that I will still get my desired mortgage product if the property appraises low. My attorney requested that the deal is contingent on an appraisal of at least purchase price. Seller attorney countered with at least purchase price less $25K.

My agent and attorney say that this request is extremely standard as a buyer protection and have never seen a rejection like this. Curious if this community knows if the contingency my attorney is seeking is indeed standard and something to be pushed for or if the sellers terms are reasonable. Since this property did not sit on market for long I am less inclined to quibble around the edges of the transaction but I have never done this before. Any thoughts would be greatly appreciated.

It's just the seller protecting themselves a bit if the house only appraised for $600k instead of $625k. You are still locked into your purchase contract.

If you are fine paying what you offered to pay (which you should be, regardless of a random appraiser's opinion)....then this is no issue.

chevca
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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by chevca » Thu Jul 25, 2019 8:56 am

Userdc wrote:
Thu Jul 25, 2019 8:36 am
Next time don’t let on that you are putting more than 20% down!
Would the offer sheet simply say, 'I'd like to buy your house'? :happy

That's kind of an important chip to play in a seller's market with competing bids. Not something to easily hide.

rascott
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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by rascott » Thu Jul 25, 2019 8:57 am

Bortky wrote:
Thu Jul 25, 2019 8:47 am
dcw213 wrote:
Thu Jul 25, 2019 8:18 am
Citing the fact that I am putting more than 20% down as a reason that I will still get my desired mortgage product if the property appraises low.
That's not necessarily true. A bank will only give a mortgage up to the appraised value less the 20% down payment.

If the house appraised for 25k less than the purchase price, it would either be up to you to put in an extra 25k, the seller to reduce the cost by 25k, or some combination of the two.

If you are purchasing a house for 500k and you are putting 25% down (125k) but the house appraises for 475k, the bank will treat it like you are only putting 21% down on a 475k house (100k down payment and 25k to make up the difference between the purchase price and appraisal) instead of 25% on a 500k house.

Well it's clear the buyer is already planning to put more than 20% down. There is typically no difference in the rate of a 80% LTV mortgage and a 75% LTV one....but would confirm this with OP's lender. OP said the $25k was 4% of purchase price....so doesn't sound like this is an issue at all. (I'm kind of reading into what buyer is saying). For all we know, buyer is putting 50% down.

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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by Mike Scott » Thu Jul 25, 2019 8:59 am

All real estate is local but in our area this would be a signal that the house was overpriced. 10% or so off list price is a typical selling price.

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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by rascott » Thu Jul 25, 2019 9:02 am

chevca wrote:
Thu Jul 25, 2019 8:56 am
Userdc wrote:
Thu Jul 25, 2019 8:36 am
Next time don’t let on that you are putting more than 20% down!
Would the offer sheet simply say, 'I'd like to buy your house'? :happy

That's kind of an important chip to play in a seller's market with competing bids. Not something to easily hide.

Most purchase agreements have it required to state how you are paying, and if using financing what % will be used. Yes, this is vital info in assessing offers. As a seller/sellers agent, I would reject any offer that didn't include details on how buyer intends to pay for the home.

UALflyer
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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by UALflyer » Thu Jul 25, 2019 9:03 am

8foot7 wrote:
Thu Jul 25, 2019 8:23 am
Personally I would withdraw the offer. (I guess technically you don’t need to since they didn’t accept it but with attorneys involved I’d be crystal clear.) your contingency is very standard. their requests are odd; not necessarily not accepting offers with contingencies, which is fairly common, but the oddball is the 25% less one.

Sellers are clearly concerned with appraisal. Your amount of down payment should not affect the value of their house. The contingency of 25% less than appraisal is laughable. Why would you proceed with a transaction when an appraiser thinks your purchase price is 20% too high?

Walk away.
The seller's request is actually not odd, and it'd be very strange for the OP to walk away over something like this. There's quite a bit of subjectivity involved in residential appraisals, particularly in situations where there are no close comps in the area and/or the market is moving quickly and the comps haven't had a chance to catch up.

Also remember that in practical terms, the fair market value of anything is not a set number but is actually a range. This is the reason that two different knowledgeable buyers could end up making totally different offers on the same house. Yet, an appraiser has to come up with a specific number, so while two appraisers might agree on a general price range, a conservative appraisal will have a lower FMV figure than a liberal one.

Lenders know nothing about the house that they're lending on, so they need something that tells them how much it's worth, so that they can figure out their borrower's downpayment, which is where the appraisal comes in. In general, once you are putting 20% down or more, it doesn't actually matter to the lenders whether the LTV ends up being 80% or 70%. Hence, the seller's argument that the buyer does not need an appraisal contingency, as the buyer will qualify for a mortgage regardless. Further, from a seller's standpoint, a buyer who is comfortable making an offer at $X should not get to renegotiate his/her offer just because an appraisal comes in lower: the buyer has presumably done his/her homework and generally has a lot more information than an appraiser who may or may not be familiar with the area and is just spending an hour or two looking at the online comps.

From a knowledgeable buyer's standpoint, an appraisal carries largely psychological benefits, although a significantly lower appraisal might also make it more difficult for the buyer to refinance down the road and/or to obtain a favorable HELOC, etc... So, while the seller's argument is not a clear winner, your suggestion that the OP should just walk away because this argument has been raised is pretty strange.

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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by rascott » Thu Jul 25, 2019 9:04 am

Mike Scott wrote:
Thu Jul 25, 2019 8:59 am
All real estate is local but in our area this would be a signal that the house was overpriced. 10% or so off list price is a typical selling price.
And in other markets 10% over list price is typical. Appraisals are an issue in a hot/fastly rising market....if this is the situation here, seller is making a prudent decision.

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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by Jack FFR1846 » Thu Jul 25, 2019 9:05 am

Do you want to buy the house for the amount agreed to?

If yes, go ahead without any appraisal contingency. If you want to get hung up on details, go ahead with arguing over this. But don't be surprised when someone else comes in and takes the house for the same price with no contingency.

We bought our first house where it appraised at 88% of our offer. I sold a car to come up with the extra money and we carried on to closing.
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UALflyer
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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by UALflyer » Thu Jul 25, 2019 9:09 am

Bortky wrote:
Thu Jul 25, 2019 8:47 am
dcw213 wrote:
Thu Jul 25, 2019 8:18 am
Citing the fact that I am putting more than 20% down as a reason that I will still get my desired mortgage product if the property appraises low.
That's not necessarily true. A bank will only give a mortgage up to the appraised value less the 20% down payment.

If the house appraised for 25k less than the purchase price, it would either be up to you to put in an extra 25k, the seller to reduce the cost by 25k, or some combination of the two.

If you are purchasing a house for 500k and you are putting 25% down (125k) but the house appraises for 475k, the bank will treat it like you are only putting 21% down on a 475k house (100k down payment and 25k to make up the difference between the purchase price and appraisal) instead of 25% on a 500k house.
The OP is putting more than 20% down. The mortgage terms would be exactly the same at 70% LTV and at 80% LTV.

AZAttorney11
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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by AZAttorney11 » Thu Jul 25, 2019 9:10 am

0% chance I’d agree to waive an appraisal contingency as a buyer.

Bortky
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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by Bortky » Thu Jul 25, 2019 9:13 am

rascott wrote:
Thu Jul 25, 2019 8:57 am

Well it's clear the buyer is already planning to put more than 20% down. There is typically no difference in the rate of a 80% LTV mortgage and a 75% LTV one....but would confirm this with OP's lender. OP said the $25k was 4% of purchase price....so doesn't sound like this is an issue at all. (I'm kind of reading into what buyer is saying). For all we know, buyer is putting 50% down.
With a purchase price of that high and it doesn't matter, but it would matter a lot more on a smaller purchase price where instead of, for example, 22% LTV he would have 18%. That would trigger a difference.

But, yes, since 25k is only 4%, it shouldn't affect the rate.

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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by UALflyer » Thu Jul 25, 2019 9:14 am

rascott wrote:
Thu Jul 25, 2019 9:02 am
chevca wrote:
Thu Jul 25, 2019 8:56 am
Userdc wrote:
Thu Jul 25, 2019 8:36 am
Next time don’t let on that you are putting more than 20% down!
Would the offer sheet simply say, 'I'd like to buy your house'? :happy

That's kind of an important chip to play in a seller's market with competing bids. Not something to easily hide.

Most purchase agreements have it required to state how you are paying, and if using financing what % will be used. Yes, this is vital info in assessing offers. As a seller/sellers agent, I would reject any offer that didn't include details on how buyer intends to pay for the home.
Precisely. In addition, a highly qualified buyer typically has greater leverage than a less qualified one, as the former offers much higher likelihood of the deal actually going through. A buyer putting a lot of money down should actually emphasize this to the seller, as it positions the buyer as a highly qualified one.
Last edited by UALflyer on Thu Jul 25, 2019 9:56 am, edited 1 time in total.

UALflyer
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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by UALflyer » Thu Jul 25, 2019 9:18 am

AZAttorney11 wrote:
Thu Jul 25, 2019 9:10 am
0% chance I’d agree to waive an appraisal contingency as a buyer.
As long as an appraisal contingency is structured in a way that ensures that the OP's LTV won't be greater than 80%, the other benefits are largely psychological.

If you are putting 20% or less down, the appraisal figure is quite important, as a lower FMV would result in a higher LTV mortgage. A higher LTV mortgage means that there could be PMI, higher interest rate and more stringent underwriting. Depending on the LTV, you may not even be able to obtain a mortgage. This is not the OP's situation though, as regular conforming mortgages with LTV's of 80% and below would not be affected by a slightly higher or lower LTV (as long as the LTV stays at 80% or below).

Userdc
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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by Userdc » Thu Jul 25, 2019 9:24 am

UALflyer wrote:
Thu Jul 25, 2019 9:14 am
rascott wrote:
Thu Jul 25, 2019 9:02 am
chevca wrote:
Thu Jul 25, 2019 8:56 am
Userdc wrote:
Thu Jul 25, 2019 8:36 am
Next time don’t let on that you are putting more than 20% down!
Would the offer sheet simply say, 'I'd like to buy your house'? :happy

That's kind of an important chip to play in a seller's market with competing bids. Not something to easily hide.

Most purchase agreements have it required to state how you are paying, and if using financing what % will be used. Yes, this is vital info in assessing offers. As a seller/sellers agent, I would reject any offer that didn't include details on how buyer intends to pay for the home.
Precisely. In addition, a highly qualified buyers typically has greater leverage than a less qualified one, as the former offers much higher likelihood of the deal actually going through. A buyer putting a lot of money down should actually emphasize this to the seller, as it positions the buyer as a highly qualified one.
This didn’t sound like a competitive bidding situation.

Sure, you can promise a larger down payment to demonstrate your financial wherewithal and differentiate your offer, but then you shouldn’t be surprised when the seller asks you to remove or soften contingencies related to your financial wherewithal.

If you don’t feel like you need to promise more than 20% down to sweeten your offer, there’s no harm in promising 20% and then showing up with 25% at the closing table. I’d love to see a contract or a deal where a seller would walk away because the buyer brings more cash than promised!

chevca
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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by chevca » Thu Jul 25, 2019 9:27 am

It may not have reached competitive because the buyers offer stating how much they were going to put down was so good. :wink:

UALflyer
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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by UALflyer » Thu Jul 25, 2019 9:28 am

Userdc wrote:
Thu Jul 25, 2019 9:24 am
This didn’t sound like a competitive bidding situation.

Sure, you can promise a larger down payment to demonstrate your financial wherewithal and differentiate your offer, but then you shouldn’t be surprised when the seller asks you to remove or soften contingencies related to your financial wherewithal.

If you don’t feel like you need to promise more than 20% down to sweeten your offer, there’s no harm in promising 20% and then showing up with 25% at the closing table. I’d love to see a contract or a deal where a seller would walk away because the buyer brings more cash than promised!
It doesn't need to be a competitive bidding situation. As a seller, when you get an offer, you obviously look at the net purchase price, but also at the buyer's ability to actually close the deal. From a seller's standpoint, a shaky buyer who offers you a high purchase price is risky, and could end up costing you time and money.

This is the reason that a highly qualified buyer always has additional leverage in negotiations, regardless of whether it's a competitive bidding situation.

I do completely agree with the rest of your post though, and 20% vs. 25% down doesn't really make a big difference to a seller.
Last edited by UALflyer on Thu Jul 25, 2019 9:30 am, edited 1 time in total.

chevca
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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by chevca » Thu Jul 25, 2019 9:29 am

Userdc wrote:
Thu Jul 25, 2019 9:24 am
Sure, you can promise a larger down payment to demonstrate your financial wherewithal and differentiate your offer, but then you shouldn’t be surprised when the seller asks you to remove or soften contingencies related to your financial wherewithal.
I do agree with that.

drk
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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by drk » Thu Jul 25, 2019 9:30 am

This seller is being unreasonable. It’s such an asinine demand that they likely just want to use it as leverage to get something else out of you.

rascott
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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by rascott » Thu Jul 25, 2019 9:31 am

Userdc wrote:
Thu Jul 25, 2019 9:24 am
UALflyer wrote:
Thu Jul 25, 2019 9:14 am
rascott wrote:
Thu Jul 25, 2019 9:02 am
chevca wrote:
Thu Jul 25, 2019 8:56 am
Userdc wrote:
Thu Jul 25, 2019 8:36 am
Next time don’t let on that you are putting more than 20% down!
Would the offer sheet simply say, 'I'd like to buy your house'? :happy

That's kind of an important chip to play in a seller's market with competing bids. Not something to easily hide.

Most purchase agreements have it required to state how you are paying, and if using financing what % will be used. Yes, this is vital info in assessing offers. As a seller/sellers agent, I would reject any offer that didn't include details on how buyer intends to pay for the home.
Precisely. In addition, a highly qualified buyers typically has greater leverage than a less qualified one, as the former offers much higher likelihood of the deal actually going through. A buyer putting a lot of money down should actually emphasize this to the seller, as it positions the buyer as a highly qualified one.
This didn’t sound like a competitive bidding situation.

Sure, you can promise a larger down payment to demonstrate your financial wherewithal and differentiate your offer, but then you shouldn’t be surprised when the seller asks you to remove or soften contingencies related to your financial wherewithal.

If you don’t feel like you need to promise more than 20% down to sweeten your offer, there’s no harm in promising 20% and then showing up with 25% at the closing table. I’d love to see a contract or a deal where a seller would walk away because the buyer brings more cash than promised!

"We made an offer on a house at list price very soon after it went on market and it was accepted quickly."

Sounds to me like it was at least somewhat a competitive market.

renue74
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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by renue74 » Thu Jul 25, 2019 9:33 am

Walk away. It's not in your best interest.

There will always be other home buying opportunities.

drk
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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by drk » Thu Jul 25, 2019 9:35 am

rascott wrote:
Thu Jul 25, 2019 9:31 am
"We made an offer on a house at list price very soon after it went on market and it was accepted quickly."

Sounds to me like it was at least somewhat a competitive market.
That sentence implies nothing at all about the competitiveness of the market.

UALflyer
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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by UALflyer » Thu Jul 25, 2019 9:52 am

renue74 wrote:
Thu Jul 25, 2019 9:33 am
Walk away. It's not in your best interest.

There will always be other home buying opportunities.
drk wrote:
Thu Jul 25, 2019 9:30 am
This seller is being unreasonable. It’s such an asinine demand that they likely just want to use it as leverage to get something else out of you.
For the reasons above, the seller's request is actually quite reasonable. I get that the OP is a first time homebuyer and is understandably nervous about this purchase and may place some psychological value on an appraisal, but that's the exact risk that the seller is trying to mitigate against. From the seller's standpoint, this is particularly important when dealing with an inexperienced buyer.

Killing this deal over something like this that won't make any practical difference to the OP would be a very strange move.

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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by bluebolt » Thu Jul 25, 2019 9:54 am

AZAttorney11 wrote:
Thu Jul 25, 2019 9:10 am
0% chance I’d agree to waive an appraisal contingency as a buyer.
In my market for the last few years, cash buyers above asking with no contingencies are relatively common. And assuming you (or your agent) have run comps, it would be odd for the appraisal to come back as a huge surprise. So, you could absolutely choose to not waive the appraisal (or other) contingencies, but it's likely your offer would not be competitive.

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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by Nate79 » Thu Jul 25, 2019 9:56 am

The appraisal is pretty much financially meaningless in this story. I would just agree and move on. Even if the appraisal came in a little lower what would you do about it? As long as you still have 20% down from the new appraised amount it has no impact. If you need to put more down to avoid PMI then you would have to do that.

We bought a house 7 months ago and because we put 20% down the lender waived the appraisal.

If you don't agree maybe the sellers would be better off to go find another buyer.

AZAttorney11
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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by AZAttorney11 » Thu Jul 25, 2019 10:04 am

UALflyer wrote:
Thu Jul 25, 2019 9:18 am
AZAttorney11 wrote:
Thu Jul 25, 2019 9:10 am
0% chance I’d agree to waive an appraisal contingency as a buyer.
As long as an appraisal contingency is structured in a way that ensures that the OP's LTV won't be greater than 80%, the other benefits are largely psychological.

If you are putting 20% or less down, the appraisal figure is quite important, as a lower FMV would result in a higher LTV mortgage. A higher LTV mortgage means that there could be PMI, higher interest rate and more stringent underwriting. Depending on the LTV, you may not even be able to obtain a mortgage. This is not the OP's situation though, as regular conforming mortgages with LTV's of 80% and below would not be affected by a slightly higher or lower LTV (as long as the LTV stays at 80% or below).
It's not about mortgage rates to me, although your point is accurate for those buyers at the 20% margin. It's about maximizing my flexibility and negotiating leverage as the buyer.

AZAttorney11
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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by AZAttorney11 » Thu Jul 25, 2019 10:06 am

bluebolt wrote:
Thu Jul 25, 2019 9:54 am
AZAttorney11 wrote:
Thu Jul 25, 2019 9:10 am
0% chance I’d agree to waive an appraisal contingency as a buyer.
In my market for the last few years, cash buyers above asking with no contingencies are relatively common. And assuming you (or your agent) have run comps, it would be odd for the appraisal to come back as a huge surprise. So, you could absolutely choose to not waive the appraisal (or other) contingencies, but it's likely your offer would not be competitive.
Sure, if someone falls in love with a property and wants to waive their rights, go right ahead. Doesn't mean I'm going to do it. There will be another "perfect" house the next street over.

onmyway33
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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by onmyway33 » Thu Jul 25, 2019 10:07 am

OP, weren't the terms of the your appraisal contingency (and how to ultimately satisfy/remove this contingency and move to closing) clearly written in your initial offer? If the seller's attorney is proposing a change to these terms that are in the seller's favor, then I would expect to be compensated by this change, such as by reduction in purchase price, credits at closing, seller providing a home warranty, seller leaving something of value with the house, etc. Whatever would be of value to you.

Of course, if you counter with some additional compensation to you, there is risk that the seller could reject your offer entirely and go under contract with another buyer.

Ultimately, in my opinion, you need to consider how much you want this house, and what you are willing to pay for the house in all possible outcomes from the appraisal. If your RE market is extremely competitive and you feel that the house will get purchased from under you quickly by someone else, this house is "the one", and you are willing to pay the initial agreed upon purchase price and can easily deal with the financial ramifications of the appraisal coming in significantly different than your offer price, then accept the seller's attorney's offer (purchase price less $25k) and get to closing. Otherwise, keep negotiating.

If you agree to the seller's attorney's counter, I would also recommend that you clearly understand the financial and mortgage ramifications if the appraisal comes back at purchase price minus $25k.

Good luck.

UALflyer
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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by UALflyer » Thu Jul 25, 2019 10:12 am

AZAttorney11 wrote:
Thu Jul 25, 2019 10:04 am
UALflyer wrote:
Thu Jul 25, 2019 9:18 am
AZAttorney11 wrote:
Thu Jul 25, 2019 9:10 am
0% chance I’d agree to waive an appraisal contingency as a buyer.
As long as an appraisal contingency is structured in a way that ensures that the OP's LTV won't be greater than 80%, the other benefits are largely psychological.

If you are putting 20% or less down, the appraisal figure is quite important, as a lower FMV would result in a higher LTV mortgage. A higher LTV mortgage means that there could be PMI, higher interest rate and more stringent underwriting. Depending on the LTV, you may not even be able to obtain a mortgage. This is not the OP's situation though, as regular conforming mortgages with LTV's of 80% and below would not be affected by a slightly higher or lower LTV (as long as the LTV stays at 80% or below).
It's not about mortgage rates to me, although your point is accurate for those buyers at the 20% margin. It's about maximizing my flexibility and negotiating leverage as the buyer.
Right, you want to be able to renegotiate the price if the appraisal comes in lower. The seller is aware that the appraisal business is fairly unpredictable, the seller has no control over the appraisal process and knows that a lower appraisal would have no practical impact on the buyer, so a buyer still insisting on a contingency in this situation would be primarily doing it to extract additional concessions down the road. Hence, the very reason that the seller is making the request in this case. In other words, from a seller's standpoint, if the buyer wants a better deal, he needs to try to negotiate it up front.

If the OP has no intention of attempting to do what the seller is understandably worried about, which is to get a second bite at the apple and to use an appraisal as a pretext to extract additional concessions, and the buyer is otherwise comfortable with the deal, there is no reason to be killing the deal over something like this, which has no practical effect on the buyer.

If the buyer wants to retain the ability to potentially re-negotiate the deal, that's fine, but by doing so he is sending a warning signal to the seller that the current deal is kind of shaky. Again, if the buyer isn't actually hoping to renegotiate the deal, then aside from the psychological benefits, the contingency doesn't actually have a practical benefit to the buyer (as long as the buyer is protected from the LTV going about 80%), so losing the deal over a meaningless contingency wouldn't make sense. If, on the other hand, the buyer does want to retain the ability to potentially re-negotiate the deal and/or places a ton of value on the psychological benefit of having an appraisal that fully supports the purchase price, then he just needs to weigh that against the prospect of potentially losing the deal.

Keep in mind that even if the buyer is able to keep an appraisal contingency and gets "lucky" and ends up with a lower appraisal, there's absolutely no guarantee that the seller would actually give in to the negotiating tactic and lower the price. If it's an otherwise strong real estate market and the seller thinks that a lower appraisal is a fluke and/or that other buyers wouldn't be deterred by it, the seller would just keep the price the same and the buyer would be in the exact same position he is in now, except that at that point he'd be out the appraisal fee.

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dcw213
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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by dcw213 » Thu Jul 25, 2019 11:01 am

UALflyer wrote:
Thu Jul 25, 2019 9:03 am
8foot7 wrote:
Thu Jul 25, 2019 8:23 am
Personally I would withdraw the offer. (I guess technically you don’t need to since they didn’t accept it but with attorneys involved I’d be crystal clear.) your contingency is very standard. their requests are odd; not necessarily not accepting offers with contingencies, which is fairly common, but the oddball is the 25% less one.

Sellers are clearly concerned with appraisal. Your amount of down payment should not affect the value of their house. The contingency of 25% less than appraisal is laughable. Why would you proceed with a transaction when an appraiser thinks your purchase price is 20% too high?

Walk away.
The seller's request is actually not odd, and it'd be very strange for the OP to walk away over something like this. There's quite a bit of subjectivity involved in residential appraisals, particularly in situations where there are no close comps in the area and/or the market is moving quickly and the comps haven't had a chance to catch up.

Also remember that in practical terms, the fair market value of anything is not a set number but is actually a range. This is the reason that two different knowledgeable buyers could end up making totally different offers on the same house. Yet, an appraiser has to come up with a specific number, so while two appraisers might agree on a general price range, a conservative appraisal will have a lower FMV figure than a liberal one.

Lenders know nothing about the house that they're lending on, so they need something that tells them how much it's worth, so that they can figure out their borrower's downpayment, which is where the appraisal comes in. In general, once you are putting 20% down or more, it doesn't actually matter to the lenders whether the LTV ends up being 80% or 70%. Hence, the seller's argument that the buyer does not need an appraisal contingency, as the buyer will qualify for a mortgage regardless. Further, from a seller's standpoint, a buyer who is comfortable making an offer at $X should not get to renegotiate his/her offer just because an appraisal comes in lower: the buyer has presumably done his/her homework and generally has a lot more information than an appraiser who may or may not be familiar with the area and is just spending an hour or two looking at the online comps.

From a knowledgeable buyer's standpoint, an appraisal carries largely psychological benefits, although a significantly lower appraisal might also make it more difficult for the buyer to refinance down the road and/or to obtain a favorable HELOC, etc... So, while the seller's argument is not a clear winner, your suggestion that the OP should just walk away because this argument has been raised is pretty strange.
This response is basically exactly what I have been thinking. While of course I want the protection I find the request reasonable for all the reasons you cited above. It is tough getting conflicting guidance from so called experts but I am inclined to accept the terms. I would be protected from a large difference should that happen.

renue74
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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by renue74 » Thu Jul 25, 2019 11:02 am

UALflyer wrote:
Thu Jul 25, 2019 9:52 am
renue74 wrote:
Thu Jul 25, 2019 9:33 am
Walk away. It's not in your best interest.

There will always be other home buying opportunities.
drk wrote:
Thu Jul 25, 2019 9:30 am
This seller is being unreasonable. It’s such an asinine demand that they likely just want to use it as leverage to get something else out of you.
For the reasons above, the seller's request is actually quite reasonable. I get that the OP is a first time homebuyer and is understandably nervous about this purchase and may place some psychological value on an appraisal, but that's the exact risk that the seller is trying to mitigate against. From the seller's standpoint, this is particularly important when dealing with an inexperienced buyer.

Killing this deal over something like this that won't make any practical difference to the OP would be a very strange move.
I buy rental property. In a hot market, sellers think they control all the strings. Two weeks ago, I put an offer in on a small 2 bedroom house in a desirable area. All cash deal, quick 5 day close...but I always include an inspection contingency because...sure I can walk a property during a showing, but I can't take the time to throughly vet everything.

Seller came back and said no inspection contingencies. That's fine...there are other properties in the future. I won't be buying this one.

In the case of this appraisal issue, as a buyer...a buyer getting financing....I would be worried that the house is over priced based on comps in the area and that me borrowing X amount could possibly put me under water during a large down turn.

In the seller's eyes..."we've got buyers next in line if you don't want the place."
That's fine...you keep thinking that. One day, it's not going to be the case.

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dcw213
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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by dcw213 » Thu Jul 25, 2019 11:11 am

Thanks all for the thoughts and perspective. Upon reflection my feeling was that if this house had been sitting on the market for a while I would be very comfortable being more aggressive in negotiations knowing that the sellers likely don’t want to start over. We bid quickly and strongly on this since we liked it and thought it was fairly priced. If the seller tried anything too crazy I would definitely walk away but I don’t think I have the leverage (i.e. a desperate seller) to be too picky.

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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by miles monroe » Thu Jul 25, 2019 11:22 am

would you pay $25,000 for a pack of gum?

if not, why would you overpay $25,000 on a house? same thing when you get right down to it.

i'd walk away. and if you do, it wouldn't surprise me if the seller decided he didn't really need that 25k clause -- it'd be in his best interest for you to get the appraisal and see what it says. and if it does in fact come in low you guys just might decide to meet in the middle.

good luck.

UALflyer
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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by UALflyer » Thu Jul 25, 2019 11:29 am

renue74 wrote:
Thu Jul 25, 2019 11:02 am
I buy rental property. In a hot market, sellers think they control all the strings. Two weeks ago, I put an offer in on a small 2 bedroom house in a desirable area. All cash deal, quick 5 day close...but I always include an inspection contingency because...sure I can walk a property during a showing, but I can't take the time to throughly vet everything.

Seller came back and said no inspection contingencies. That's fine...there are other properties in the future. I won't be buying this one.

In the case of this appraisal issue, as a buyer...a buyer getting financing....I would be worried that the house is over priced based on comps in the area and that me borrowing X amount could possibly put me under water during a large down turn.

In the seller's eyes..."we've got buyers next in line if you don't want the place."
That's fine...you keep thinking that. One day, it's not going to be the case.
An inspection contingency is designed to protect against a very different category of risks, especially on something other than a small and simple property. Most buyers don't have the knowledge required to assess the condition of the roof, foundation, structural issues, etc... That's what a home inspector is for and a home inspection does protect you against potentially significant practical risks.

On the other hand, an appraisal contingency in the OP's situation would not shield him from any practical risks or concerns (as long as he is protected against the LTV going above 80%). The fact that in a hot market sellers have a lot of control is certainly frustrating to homebuyers, but walking away from a deal that you are otherwise happy with just to send some symbolic gesture to the seller that he is not in control is like cutting off your nose to spite your face. These are the kinds of emotional and irrational decisions that people have a tendency to make without realizing that they're paying a very real financial price for them.

If the OP doesn't like the house or the deal, he should absolutely walk away, but this particular appraisal issue has nothing whatsoever to do with any of it. Again, a residential real estate appraisal is, by definition, subjective (because nothing out there has a set price that every single person out there would agree on), with an appraiser knowing nothing about the comps, except what is shown in the online listings. Hence, you should not be using the appraisal as some sort of gospel and a way to tell you how well your house might be appreciating (or depreciating) in the future.

If you are worried that you are overpaying for a house, that's a perfectly legitimate concern and one that is shared by every homebuyer out there. The way to alleviate it is to visit more houses in the area and get to know everything that's out there, not to just rely on an appraisal and to hope that the appraiser who spent a couple of hours looking at the online listings happened to get the price just right (and again, there's no such thing, as the price of anything is always a range).

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ResearchMed
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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by ResearchMed » Thu Jul 25, 2019 11:38 am

miles monroe wrote:
Thu Jul 25, 2019 11:22 am
would you pay $25,000 for a pack of gum?

if not, why would you overpay $25,000 on a house? same thing when you get right down to it.

i'd walk away. and if you do, it wouldn't surprise me if the seller decided he didn't really need that 25k clause -- it'd be in his best interest for you to get the appraisal and see what it says. and if it does in fact come in low you guys just might decide to meet in the middle.

good luck.
It's *not* the same thing.
A pack of gum has a standardized price, perhaps even with a known discount at some discounters, etc.

But the house "value"? Unless it's one of quite a few truly cookie cutter identical homes (on identical lots, etc.), there is no standardized price. And $25k could be a very tiny percentage of the total cost.

That's like saying one shouldn't pay 2% (or somewhat more) extra to get the gum flavor one wants, rather than wait to hope there is another flavor, sometime/eventually, that one likes as much/etc.

Would you really walk away from the *exact* car you want (all features wanted, non not wanted, right color, etc.) if it cost, say, $10 or $100 more than a less desirable one, even if it's "only" a color you dislike, etc.?

RM
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ResearchMed
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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by ResearchMed » Thu Jul 25, 2019 11:51 am

UALflyer wrote:
Thu Jul 25, 2019 11:29 am
renue74 wrote:
Thu Jul 25, 2019 11:02 am
I buy rental property. In a hot market, sellers think they control all the strings. Two weeks ago, I put an offer in on a small 2 bedroom house in a desirable area. All cash deal, quick 5 day close...but I always include an inspection contingency because...sure I can walk a property during a showing, but I can't take the time to throughly vet everything.

Seller came back and said no inspection contingencies. That's fine...there are other properties in the future. I won't be buying this one.

In the case of this appraisal issue, as a buyer...a buyer getting financing....I would be worried that the house is over priced based on comps in the area and that me borrowing X amount could possibly put me under water during a large down turn.

In the seller's eyes..."we've got buyers next in line if you don't want the place."
That's fine...you keep thinking that. One day, it's not going to be the case.
An inspection contingency is designed to protect against a very different category of risks, especially on something other than a small and simple property. Most buyers don't have the knowledge required to assess the condition of the roof, foundation, structural issues, etc... That's what a home inspector is for and a home inspection does protect you against potentially significant practical risks.

On the other hand, an appraisal contingency in the OP's situation would not shield him from any practical risks or concerns (as long as he is protected against the LTV going above 80%). The fact that in a hot market sellers have a lot of control is certainly frustrating to homebuyers, but walking away from a deal that you are otherwise happy with just to send some symbolic gesture to the seller that he is not in control is like cutting off your nose to spite your face. These are the kinds of emotional and irrational decisions that people have a tendency to make without realizing that they're paying a very real financial price for them.

If the OP doesn't like the house or the deal, he should absolutely walk away, but this particular appraisal issue has nothing whatsoever to do with any of it. Again, a residential real estate appraisal is, by definition, subjective (because nothing out there has a set price that every single person out there would agree on), with an appraiser knowing nothing about the comps, except what is shown in the online listings. Hence, you should not be using the appraisal as some sort of gospel and a way to tell you how well your house might be appreciating (or depreciating) in the future.

If you are worried that you are overpaying for a house, that's a perfectly legitimate concern and one that is shared by every homebuyer out there. The way to alleviate it is to visit more houses in the area and get to know everything that's out there, not to just rely on an appraisal and to hope that the appraiser who spent a couple of hours looking at the online listings happened to get the price just right (and again, there's no such thing, as the price of anything is always a range).
An inspection contingency can indeed help protect from a problem with financing.

If one specifies appropriate time constraints (7 - 10 days is common in our area), that also gives you enough time to have a home inspection and get the results. One could, if needed, then declare that there were x/y/z deficiencies and one simply did not want to deal with a house like that. And then get that first deposit back.

This works especially if one has already be pre-approved (not pre-qualified) AND if one is very "overqualified" for the purchase price, or also if one would be willing/able to put a lot more "down" if necessary.

RM
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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by stan1 » Thu Jul 25, 2019 12:01 pm

We were able to negotiate down the purchase price of our most recent home by $30K because the appraisal came in $30K lower than we offered. Through our agent we told the buyer we would walk away if they didn't lower the price to the appraised value. The seller lowered their price accordingly. Realtors get a lot of hate on this board but after this deal my realtor drove straight to my house smiling and fist bumped me. He was jazzed up that he got the seller to agree to a $30K reduction. He's competitive and likes to win. That's a good attribute in a real estate agent.

I would not waive the appraisal contingency, especially if the house has been on the market for a long time. I fully understand why the seller would like you to waive it. They don't want you to renegotiate if the appraisal comes in low. You do want to renegotiate if the appraisal comes in low. Tell your lawyer to hold ground and maintain the contingency. Keep negotiating the $25K offered by the buyer down.

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FlyAF
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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by FlyAF » Thu Jul 25, 2019 12:02 pm

Common practice in my hot market. In fact I just went under contract on my house (day 1 on MLS) for over asking price and put in a no appraisal contingency. I don't care what some random says it's worth. I want the buyer to pay what they offered. Buyer of course accepted the terms. If they need to come up with extra cash to close, that's between them and their bank.

HomeStretch
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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by HomeStretch » Thu Jul 25, 2019 12:05 pm

After hearing of price renegotiations or cancelled deals due to appraisals below selling price, as a Seller I would negotiate for no appraisal contingency and as a Buyer I would do the opposite.

FreemanB
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Re: First Home Purchase - Disagreement on Appraisal Contingency

Post by FreemanB » Thu Jul 25, 2019 12:07 pm

dcw213 wrote:
Thu Jul 25, 2019 8:18 am
I am in an unexpected situation in going through my first home purchase. We made an offer on a house at list price very soon after it went on market and it was accepted quickly. We are in attorney review now. We went through inspection and settled on some terms for repairing defects etc. Unexpectedly the sellers attorney rejected our request for an appraisal contingency, citing the fact that I am putting more than 20% down as a reason that I will still get my desired mortgage product if the property appraises low.
I'm confused about something. When you made your initial offer, it should have included any and all contingencies you desired. You said they accepted that offer quickly, and it sounds like there was no appraisal contingency included. So did you have an accepted offer on the home, without the appraisal contingency? Then later in the process, after the inspection was completed and settled, you wanted to modify your offer to include an additional contingency for the appraisal. If that is the case, I wouldn't accept your request either, not at this point in the process.(It may have been acceptable in the beginning, but the lack of contingencies may have influenced how quickly they accepted your offer) It doesn't matter what reasons they gave, since they didn't actually have to give any to reject your request to modify the sales contract. If I were the seller, I would also reject any attempt to modify the sales contract this late in the process, particularly if there was no need for it.(You haven't even completed the appraisal yet)

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