Appraisal gap issue, buyers won’t negotiate

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Appraisal gap issue, buyers won’t negotiate

Nicholas Grell
Member since 2020 · 4 posts · 0 votes

We are selling our primary home in a very hot San Diego market. We received multiple offers, pushing the price 40k+ over asking. Accepted offer came from a buyer  utilizing an appraisal gap clause to offer an addition 10k over appraisal. We got hit with a rather low appraisal that even with the 10k, leaves an 8k shortfall. We have tried all lines of negotiation with the buyer (request second appraisal, split the difference, accept lower price with allowance of 1 month free rent back), the agents have even offered to throw some commission back, but the buyers refuse. They believe (and are being advised), that we as the sellers are contractually obligated to sell them the property at this now lower price of appraisal + 10. We are now being threatened with a lawsuit after close if we do not oblige them. Our broker’s attorney thinks it’s crazy, but the buyers are now being represented by a well seasoned California real estate attorney. What are we missing here? We’ve done so many investment real estate transactions, but of course the first sale of a “family home” and it all goes awry. Any advice would be greatly appreciated!

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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
5y

@Nicholas Grell Okay, so this is not any type of “standardized” appraisal addendum. But BTW, #3 Does supersede #1, as written.  It is Very poorly written and neither agent should have let it go as written.

My first thought was........It does Not say what happens if the appraisal is more than $10k below the contract price....ie. either buyer can walk Or seller sells for appraisal plus $10k.

But, after reading it again, my thought is.....the clause says the buyer will pay the Difference Between Appraisal and the Sales  Price (up to $10k).  No Where, does it say seller will sell for “appraisal plus $10k”.  To me, they are dead in the water.

Typically, when such an ambiguity is the crux of a court action, the court rules against whoever drafted the ambiguous clause.  Since they are “threatening” to sue “After the closing”, as opposed to now, I’d consider it less likely, and more of just a bluff.

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  • Steve Morris
    Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes
    5y

    "Acceptedoffer came from a buyer utilizing an appraisal gap clause to offer an addition 10k over appraisal."

    Ummm, did you or did you not accept these terms?  Why do you think you can change the basic terms of a contract after you sign it?  LIke you're getting $40K over asking already and it's not enough?

    Not saying changes don't happen after due diligence, but you should understand what an appraisal is and what $10K more means.

    You can always just break your promise and not sell.  Have no clue on how successful specific performance will be.

    2Reply
  • Nicholas Grell
    OP
    Member since 2020 · 4 posts · 0 votes
    5y

    Steve Morris - so you read an appraisal gap clause as a price determiner? Buyer's offer's main term was a purchase price of X that they are no longer willing to pay. Appraisal gap language does not say - we will pay this much over appraisal, and appraisal shall determine final purchase price. 

    All kinds of things are initially included in offers, that are then renegotiated as the deal proceeds. Buyer's specifically said they wouldn't ask for Termite, guess what, they did! I don't understand what the amount over offering has to do with it? We had 3 other very similar offers, perhaps we priced too low. 

    Is there precedence for your interpretation, as this is not the advice of our agent? I am trying to figure out where we stand here and how to proceed. 

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  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    5y
    Originally posted by @Nicholas Grell:

    We are selling our primary home in a very hot San Diego market. We received multiple offers, pushing the price 40k+ over asking. Accepted offer came from a buyer  utilizing an appraisal gap clause to offer an addition 10k over appraisal. We got hit with a rather low appraisal that even with the 10k, leaves an 8k shortfall. We have tried all lines of negotiation with the buyer (request second appraisal, split the difference, accept lower price with allowance of 1 month free rent back), the agents have even offered to throw some commission back, but the buyers refuse. They believe (and are being advised), that we as the sellers are contractually obligated to sell them the property at this now lower price of appraisal + 10. We are now being threatened with a lawsuit after close if we do not oblige them. Our broker’s attorney thinks it’s crazy, but the buyers are now being represented by a well seasoned California real estate attorney. What are we missing here? We’ve done so many investment real estate transactions, but of course the first sale of a “family home” and it all goes awry. Any advice would be greatly appreciated!

    It is easy to threaten a law suit.  My non-legal opinion is nothing will result from it.

    The buyer was obligated to cover appraisal $10K below negotiated price.  Seeing that the appraisal came in below that value, the finance contingency will allow them to walk away from the deal.  Not sure why they believe the seller is obligated to sell to them at the appraised value + $10K.  I suspect the lawsuit is an empty threat.  I get threatened with lawsuit too often.  None have ever occurred.  I have a substantial umbrella policy if one ever does occur, so I laugh them off.  One lawyer has threatened to sue me at least half dozen times.  I call him two-bit to his face.  He cursed at me at our last exchange.  I think he avoids me now as he knows his threats just entertain me, but they raise his blood pressure (my wife initially had her blood pressure raised, but even she is now entertained by them).

    A third party that typically strives to justify the negotiated price indicates the property is worth over $10K less than the negotiated price.  The appraisal establishes the expert determined value.  The buyer likes the property enough that they are willing to pay $10K over the expert established value.   I understand why the buyer would not want to pay more than $10K over the value and is unwilling to go up any higher in price or even split a reappraisal fee (they paid for the first appraisal).  Note even if the new appraisal indicates a higher value, the lender is not obligated to use it.  the new appraisal has multiple ways that from the buyers perspective it is risking additional expense for an over priced property.  Now a question for you: Why do you think someone will or should pay more than $10K over the independent expert established value?

    The current appraisal will be associated with the property.  You may find it difficult to get another buyer willing to pay over the independent expert valuation.  Paying more likely means that a subsequent buyer would have to bring more than $10K additional to the closing.  Finding another buyer willing to pay over the value, especially once the value has been set by a Fanny/Freddy appraiser, may not be easy.

    My recommendation is you consider reducing your ask to very close to appraisal + $10K.  Maybe $2K higher as the buyer is likely into this for nearly $2K with the appraisal cost and possibly home inspection.  The buyer may accept.  If the buyer walks, you may find it hard to get over the appraised value.  Who wants to knowingly pay more than retail?

    in summary, I would not fear the law suit threat at all, but I would try to get this transaction completed because it may be difficult to find another buyer willing to pay over the expert established value and willing to bring additional funds to the closing.

    Good luck
     

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  • Steve Morris
    Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes
    5y
    Originally posted by @Nicholas Grell:

    All kinds of things are initially included in offers, that are then renegotiated as the deal proceeds. 

    And that's fine if you discover something later on like thru an inspection.

    However, you did agree to a price at appraisal + $10K, right?  Maybe I'm not understanding that clause since I don't see that in OR on offers.

    What would've happened if the appraisal would've been $100K higher + $10K?  I'd still expect the buyer to honor his offer other things notwithstanding.

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    5y

    @Nicholas Grell We, outside of Cali don’t know what your “appraisal plus $10k” addendum says, so we can’t offer a valid opinion.

    I would assume it says the buyer may void the contract if their price was more than $10k above appraisal.....this would not obligate you to sell for “appraisal plus $10k, but simply give them the option to walk. This seems to be your agent’s interpretation. 

    Or....does it say you will drop the price to “appraisal plus $10k”?  This is the position they are taking. 

    If you could post the Entire addendum here, it would be more clear. 

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  • Nicholas Grell
    OP
    Member since 2020 · 4 posts · 0 votes
    5y

    Here is the language of the Buyers Counter Offer Terms

    1. Price is X

    some other terms

    3. Should property fail to appraise, Buyers agree to pay any difference between appraised value and sales price up to a maximum of $10,000. but no more than the agreed upon price.

    They want to supersede Term 1, with Term 3. 

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  • Nicholas Grell
    OP
    Member since 2020 · 4 posts · 0 votes
    5y


    @Dan H., we have offered the Buyer multiple options to remedy this issue, including the option to quit without penalty even though they released their finance contingency. We seem to be holding all the cards in this situation, and yet they keep doubling down, so we just want to make sure we aren't missing anything. 

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  • Clint ShelleyPro Member
    Surveyor · Dothan, AL · Member since 2014 · 425 posts · 391 votes
    5y

    I see it as an out for them to walk, not an obligation for you to sell. Your selling at x but they are only willing to pay y+10k. So the net equation is = z ya later. No deal. Have your agents broker review the contract. That's their field of expertise.

    Clint

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    5y

    @Nicholas Grell Okay, so this is not any type of “standardized” appraisal addendum. But BTW, #3 Does supersede #1, as written.  It is Very poorly written and neither agent should have let it go as written.

    My first thought was........It does Not say what happens if the appraisal is more than $10k below the contract price....ie. either buyer can walk Or seller sells for appraisal plus $10k.

    But, after reading it again, my thought is.....the clause says the buyer will pay the Difference Between Appraisal and the Sales  Price (up to $10k).  No Where, does it say seller will sell for “appraisal plus $10k”.  To me, they are dead in the water.

    Typically, when such an ambiguity is the crux of a court action, the court rules against whoever drafted the ambiguous clause.  Since they are “threatening” to sue “After the closing”, as opposed to now, I’d consider it less likely, and more of just a bluff.

    5Reply
  • Mike CumbieBusiness Member
    REALTOR® · Brockport, NY · Member since 2015 · 3k+ posts · 4k+ votes
    5y

    To me it sounds like. They can walk if they want with EMD. You don't have to go down and they don't have to go more than 10K over appraisal. If course your local language and precedent will override my thoughts.

    2Reply
  • David M.
    Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
    5y

    @Nicholas Grell

    So, let me see if I get this straight.  Lets say the agreed purchase price is $100.  So, the house appraised at $72?  And, they are willing to only pay $82?  Just curious to make sure I understand what's going on.  The San Diego market is so hot its moving faster than the appraisals, huh?.

    Do you guys use attorneys in California normally?  They actually signed off on this during attorney review (I assume that's part of your process in CA if you use attorneys).  I agree with the other comments.  Its so vague and incomplete.  I'm not an attorney, but I can interpret it such that it no longer applies since you are beyond the $10k max.  The statement is like one of those optical illusion images, every time I read it my brain hurts because I keep coming up with a different interpretation.

    By the way, does California have a 3 day right of rescission for the seller after closing?  Or, is that just a NJ thing?  When I sold my last property, there was this disclosure and when I asked my attorney, he told me there is as 3 day right rescission for the seller, too (just like for a mortgage, etc.).  He continue to explain that basically you can't force somebody to sell their property, just like you can't force somebody to take a loan or buy a property.  Not saying you should go through closing and use it, but if it exists in CA, then its one way to counter I suppose.

    My layman's opinion is let them waste their money on that other attorney.  They are the ones that are probably scared because they still want the property, especially in this hot market.

    Good luck.

    0Reply
  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    5y
    Originally posted by @David M.:

    @Nicholas Grell

    So, let me see if I get this straight.  Lets say the agreed purchase price is $100.  So, the house appraised at $72?  And, they are willing to only pay $82?  Just curious to make sure I understand what's going on.  The San Diego market is so hot its moving faster than the appraisals, huh?.

    Do you guys use attorneys in California normally?  They actually signed off on this during attorney review (I assume that's part of your process in CA if you use attorneys).  I agree with the other comments.  Its so vague and incomplete.  I'm not an attorney, but I can interpret it such that it no longer applies since you are beyond the $10k max.  The statement is like one of those optical illusion images, every time I read it my brain hurts because I keep coming up with a different interpretation.

    By the way, does California have a 3 day right of rescission for the seller after closing?  Or, is that just a NJ thing?  When I sold my last property, there was this disclosure and when I asked my attorney, he told me there is as 3 day right rescission for the seller, too (just like for a mortgage, etc.).  He continue to explain that basically you can't force somebody to sell their property, just like you can't force somebody to take a loan or buy a property.  Not saying you should go through closing and use it, but if it exists in CA, then its one way to counter I suppose.

    My layman's opinion is let them waste their money on that other attorney.  They are the ones that are probably scared because they still want the property, especially in this hot market.

    Good luck.

     In San Diego it is more likely $1m versus $720k.  

    In San Diego it is unlikely to have lawyers involved in offers.  You would think with  properties in many areas going for over $1m that lawyers would be involved in the offers, but I have never used a lawyer in my offers. 

    We have a standard 17 day due diligence that is the default, but no escape after close not including fraud, etc.  so no 3 day right of rescission.  

    I 100% agree the threat of suing is only a scare tactic. the buyer can walk as the appraisal is not within $10k of negotiated price or they can bring additional money.  If the buyer walks, seller may find it difficult to sell for more than the appraised value.   

    I think both the buyer and the seller should want this transaction To proceed.  The buyer has out of pocket expenses if this does not close.  If the transaction does not complete, The seller will have a property with an appraisal indicating a value significantly less than they want for the property.  

    3Reply
  • Victor N.
    Investor · Meriden, CT · Member since 2013 · 201 posts · 145 votes
    5y

    Why can’t you do your own appraisal and compare the two? You can certainly contest the buyer’s appraisal.

    1Reply
  • Steve Morris
    Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes
    5y

    3. Should property fail to appraise, Buyers agree to pay any difference between appraised value and sales price up to a maximum of $10,000. but no more than the agreed upon price.

    I understand you can get out of any deal since specific performance is rare.

    However, seller agreed to 3.  Which implies he accepted the buyer would pay appraisal + $10K.

    It is written poorly, but not much different than "property price must meet or beat appraisal" and an adjust.  So I guess it does limit buyer's options to buy at buyer price to just walking if you get a seller like this.

    Just think the seller (or his agent) was kinda dumb to sign something without understanding it and now he's all hurt because he's not getting the absolute maximum out of the deal.

    2Reply
  • Jonathan R McLaughlin
    Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
    5y

    @Nicholas Grell separate the battle and the war. By my estimate even with the 8k "shortfall" you are at 30K over your asking price? Sounds like a win to me. Do I have the math wrong?

    1Reply
  • Kenneth Donaghy
    Real Estate Broker · San Diego, CA · Member since 2016 · 355 posts · 195 votes
    5y

    @Nicholas Grell - That is a strange clause to accept, especially knowing many appraisals are coming under purchase price here in San Diego. So much so I have seen more often than not, offers not being accepted unless there is no appraisal contingency.  Second your broker should know what to do. Yet they may need to protect themselves too. I would suggest a few options, yet ethically because you are represented by another agent, I'm not allowed to give you advice. I do wish you luck, and please keep me posted on how this plays out. Thanks! 

    1Reply
  • Bruce May
    Lender · San Diego, CA · Member since 2011 · 664 posts · 231 votes
    5y

    3. Should property fail to appraise, Buyers agree to pay any difference between appraised value and sales price up to a maximum of $10,000. but no more than the agreed upon price.

    I think the clause is clear. The Buyer and their agent obviously felt the home would not appraise. Maybe they felt your asking price was too high and/or the $40k over asking was too high... I don't know which. In either case it seems they wanted to protect themselves knowing their lender would only finance X amount of the appraised value and they wanted to limit their exposure to no more than $10k over the appraised value.

    You agreed to the clause, I think you need to stick to it even if you didn't anticipate all possibilities. 

    4Reply
  • Steve Morris
    Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes
    5y

    You agreed to the clause, I think you need to stick to it even if you didn't anticipate all possibilities.

    Amen.  THis guy would be bragging about how much he made if it went his way as a seller, now he's whining.

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    5y
    Originally posted by @Steve Morris:

    You agreed to the clause, I think you need to stick to it even if you didn't anticipate all possibilities.

    Amen.  THis guy would be bragging about how much he made if it went his way as a seller, now he's whining.

    I read it as buyers out.. unless there was specific language that said they MUST sell for that amount.. maybe not seeing all of the contract.

    as for specific performance that is pretty rare.. I did one in PDX.. and it went like this..  Day of closing  put ALL the cash into escrow let it sit there for about 2 years while you wind your way through the court system.. I was the buyer  we did end up winning.. But most folks are not going to do this for a house to live in..  ERGO they want to close and sue later  :)  case is not worth it.. they are arguing over less than 20k it looks like attorneys fee's would eat all that up.. Not to mention i bet their contracts are like most.. That disputes must go to Arb first before litigation.

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  • Marcus Auerbach
    Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
    5y

    This is not a legal issue @Nicholas Grell.  It's a pride issue.

    My suggestion: close the deal! Don't be hung up on victory, or fair splitting it in the middle. 

    You are getting over asking and over appraisal! Take it!

    If you kill it and go back to market, your new offers will be lower than the first time around, in my experience substantially lower - you may get "just" asking price. On top of that you are not guaranteed to that the next appraisal will work in your favor. There is a pretty good chnace that you walk away with less money than if you close this one.

    Plus all the time, hussle, holding cost - for 4k?

    Had a similar situation, grated in Milwaukee and not San Diego, a couple months ago - seller would not negotiate, we offered half, would not take it and chose to terminate. I just saw the deal close for 20k less two months later, he shot himself in the foot real good. Don't be that guy!

    I know it is hard when you feel you should get something and you are not, when they don't want to split it. But you have to be cool as a cucumber and just go by the numbers. You can be right and still be dead. 

    Close it and start packing.

    3Reply
  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    5y
    Originally posted by @Jay Hinrichs:
    Originally posted by @Steve Morris:

    You agreed to the clause, I think you need to stick to it even if you didn't anticipate all possibilities.

    Amen.  THis guy would be bragging about how much he made if it went his way as a seller, now he's whining.

    I read it as buyers out.. unless there was specific language that said they MUST sell for that amount.. maybe not seeing all of the contract.

    as for specific performance that is pretty rare.. I did one in PDX.. and it went like this..  Day of closing  put ALL the cash into escrow let it sit there for about 2 years while you wind your way through the court system.. I was the buyer  we did end up winning.. But most folks are not going to do this for a house to live in..  ERGO they want to close and sue later  :)  case is not worth it.. they are arguing over less than 20k it looks like attorneys fee's would eat all that up.. Not to mention i bet their contracts are like most.. That disputes must go to Arb first before litigation.

     I totally agree.  The seller indicating they will pay no more than the appraisal in no way indicates that the seller is obligated to cover any additional gap.   Interpreting otherwise is reading into it something that is not stated.  Even if it was the buyer’s intent was that the seller would cover the additionalgap, in the absence of stating it, this wording only allows the seller an escape clause that would allow them to get their earnest money back.

    Gap coverage is not that rare.  My last offer has a gap coverage in excess of $50k.   If the gap is exceeded, i can choose not to proceed.   It does not obligate the seller to cover the additional gap.  it does imply that I am not going to cover any additional gap. 

    I question if any of the people who believe the seller has agreed to cover the additional gap have ever used a gap coverage. The purpose is to distinguish the offer to the seller. It is not to be a detriment to the seller unless worded differently with much clearer wording.   As indicated, it is very similar to the wording in my offer that is in escrow  

    If the appraisal comes in that low, the seller has more incentive to come down than I have to come up.   The seller would be selling for more than an independent qualified (debatable on how qualified) party valued the property.  If the transaction did not close, the property would be associated with this low appraisal.  It is my opinion having such an appraisal would need to be disclosed on the disclosure form.  The buyer is (I am) already agreeing to pay more than the RE is valued by an independent appraiser.  

    Both parties benefit from this closing, but the seller likely has more to lose if this does not close.  As the buyer, I have no incentive to pay for another appraisal and would not.  As the buyer, I committed to cover the gap I was willing to cover.  I would be hesitant to agree to pay even more over value than I have already agreed to.  If I was the seller, I would realize the resulting difficulties in selling if this transaction did not close.  I suspect if the seller wants this to sell anytime soon, they likely need to lower the price to very near the gap price. 

    My view is the threat of lawsuit is only a threat.  nothing stated obligates the seller to cover the gap. The wording on my contract is similar. 

    I would not let the threat of lawsuit impact my decision if I were the seller.  

    2Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    5y

    You can get a second appraisal done and see what happens.  With multiple offers on the table, I would not have accepted that offer.

    1Reply
  • Joe S.Pro Member
    Investor · San Antonio · Member since 2020 · 3k+ posts · 3k+ votes
    5y
    Originally posted by @Marcus Auerbach:

    This is not a legal issue @Nicholas Grell.  It's a pride issue.

    My suggestion: close the deal! Don't be hung up on victory, or fair splitting it in the middle. 

    You are getting over asking and over appraisal! Take it!

    If you kill it and go back to market, your new offers will be lower than the first time around, in my experience substantially lower - you may get "just" asking price. On top of that you are not guaranteed to that the next appraisal will work in your favor. There is a pretty good chnace that you walk away with less money than if you close this one.

    Plus all the time, hussle, holding cost - for 4k?

    Had a similar situation, grated in Milwaukee and not San Diego, a couple months ago - seller would not negotiate, we offered half, would not take it and chose to terminate. I just saw the deal close for 20k less two months later, he shot himself in the foot real good. Don't be that guy!

    I know it is hard when you feel you should get something and you are not, when they don't want to split it. But you have to be cool as a cucumber and just go by the numbers. You can be right and still be dead. 

    Close it and start packing.

    You made some very valid points. I can only vote for your post once so I had to comment on it as well. The seller will more than likely sell for less the second time around. 

    0Reply
  • Bob E.
    Queen Creek, AZ · Member since 2014 · 2k+ posts · 1k+ votes
    5y

    This is a great learning opportunity for all of us on BP, thanks for sharing.  First rule of Business, read the contract.  In this case the buyer slipped in a "Heads I win. Tails you lose" Clause.  

    Language probably should have been along the lines of: If property fails to appraise buyers offer is reduced to Appraisal +10k, up to max of original bid.  Seller can accept new price or cancel contract.

    Note, I don't see anything in that clause saying who orders the appraisal and that it is limited only one appraisal being done.

    0Reply
  • Steve Morris
    Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes
    5y

    "I don't see anything in that clause saying who orders the appraisal and that it is limited only one appraisal being done."

    Usual and customary is that the lender orders the appraisal from a disinterested third party.  I'm assuming the guy is MAI-certified also.

    If a buyer or seller ordered the appraisal or put one together it wouldn't appear as impartial.

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