Seller wants us to waive appraisal clause - thoughts?

Question

Hi All,

I like to the BP thoughts on this.

Context - We are in the midst of purchasing a 3-family property in NYC to be used as an investment rental.

We agreed upon a purchase and had our contract drafted and sent to the sellers lawyers.

The seller came back very upset, that he wants us to waive the mortgage appraisal clause in our contract? This clause protects in the case of us needing to walk away from the deal if the appraisal comes in too low. NYC property’s fluctuate quite a bit from neighborhood to neighborhood. The current assessed tax value is $780k and the agreed upon purchase price is $995k.

We also had additional clauses for his tenants since he had a section 8, requesting him to escrow some money until the rent starts to come to us - since the transition takes forever.

The sellers seems like he just wants to completely unload the property without any stipulation.

I wanted to hear folks thoughts on the matter?

Bill B. · Answer

Can you bring an extra $200k to the table if it only appraises for $795k?

Maybe change the offer to $925 or $950k without the appraisal contingency? (Find out what’s more important to seller price or assured closing.)  IF you have other outs like inspection or partners approval.

How fast can you get an appraisal? Maybe you can get it done while you’re still in inspection period? Then if the appraisal doesn’t work out you hand in the $50,000 repair list and bail if the seller won’t cover it.

Munim Jalil · Answer

Hi All,

Thank you all for the great feedback.

I wanted to provided some additional context and update on the deal.

Context - The targeted property is actually attached on both sides to two properties we currently own, we will have economy of scale post deal closing. This property will enable us to own the full lot and opens us for further expansion and buildout (strategic purchase for us). We are extremely versed and conservative on the value of the property, we know the seller and acquiring the property on a deal. Since we own some of the surrounding rentals we already have actual comparables to ground our model. The property also comes fully occupied with a high rent roll. Based on the cashflows and NYC open market - this property would be listed for $1.2M on the open market via realtor. Unfortunately, NYC hasn't seen the same softness in purchase prices relatively to other markets, $1M was the best offer.

Deal Update - We should be in contract by the end of the week unless the seller has additional redlines to the contract.

Will keep you guys posted as we move along the deal cycle.

Best,

MJ

Basit Siddiqi · Answer

Put whatever you want in the contract that you feel comfortable with and that will protect you.With the environment of raising interest rates, that is causing a downward trend on comps.Best of luck

Paul De Luca · Answer

Don't waive the appraisal clause.

But when you say the current assessed tax value is $780k, in my experience that is NOT the same as the market value. Tax assessors estimate the value of properties for the purpose of property tax calculations. You agreed on the purchase price of $995k I assume because you pulled comps and determined the property is worth that. So I don't think you're in danger of a $200k shortfall here unless you are completely ignoring what the comps are saying.

Theresa Harris · Answer

Why would you waive it? What happens if it doesn't appraise and you don't get the loan.  I'd keep it.

Brad S. · Answer

It's either terms or price. If they are asking for no appraisal contingency (better terms for seller), then I would need a significantly better price. Unless, there is a significant reason that makes this deal attractive to you. But, it sounds like this is close to a market value deal, so I wouldn't waive the appraisal contingency. And it seems that many markets are no longer crazy seller markets, so you may have an edge there, if the seller really wants to sell.

Chris Seveney · Answer

Do not waive the appraisal clause. If they demand it then walk from the deal.

Bob S. · Answer

wow 3 fam for 1 MILL!! Holly cow, We can get a 25 unit for that price in the Cleveland markets or 10 SF ,with 1300 each in rent. But anyway, all due respect, If you do not know the value you should not be buying it. Its up to you as an investor to know pricing and values. I can tell you in under 20 seconds the value of any property anywhere in my markets.

PLEASE do not buy this, just yet. Connect with an investor that knows your area. Get their advice /opinion.

Sec 8 only takes a week or so to transfer to the new owner,,,,, PLEASE get help from someone with more experience, This is a mill dollars, Do not want to see you get hurt

All the best

Jacob St. Martin · Answer

The only way that you should even consider this is if you have enough liquid cash to cover the worst case scenario with the appraisal and don't mind putting that cash in this deal (which I imagine is probably not the case). I would also be very conservative when estimating your appraisal. I am not an appraiser but I imagine that they are going to be more conservative now that the market is slowing down to a more normal level. If you are willing to do that I would use it as a negotiating tool. If I were you I would say something like, "Based on what you are asking me to do, it sounds like you just want to get out of this property as soon as possible. Is that correct? If so I can make that happen for you. However, if you want those terms you are going to have to adjust the price to reflect the sacrifice that I am making on the terms. Do you think that sounds unreasonable? If not I would be glad to continue with the contract as is." If you present it to them as a choice between getting the price they want or the terms they want they will probably be more willing to negotiate and will still feel like they have agency and are not being strong-armed by you even though you will be getting what you want one way or another.

Seller wants us to waive appraisal clause - thoughts?

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