What is an Appraisal Addendum and Why Should YOU Care?

What is an Appraisal Addendum and Why Should YOU Care? Let’s Talk About It!

Hey what’s up Michael here, Top Producing Agent Turned Real Estate Broker, Trainer and Coach. On this channel I help real estate agents build their business so they can create more Time and Money! So go ahead and HIT that Subscribe button right down there and whack the Bell so you’re sure to catch my future content and also while you’re at it, go ahead and give me a Thumbs up! Thanks!

Ok let’s talk about the Appraisal Addendum, the form is actually called “Addendum Concerning Right to Terminate Due to Lenders Appraisal” First of all… the market is on fire and buyers are in bidding wars trying to buy houses and so what’s happening is buyers are offering to pay 5, 10, $20,000 plus just to get their offer accepted by a seller.

Here’s the problem… A Buyer agrees to pay $20,000 over list and their offer gets accepted they go through the inspection process, negotiate repairs, option period is over, now 2 to 3 weeks go by the sellers are planning to move, packing, getting ready to close on the home that they are buying and 1 week before closing everything comes to a screeching halt!

The Appraisal come in and it’s $20,000 under the contract sales price and what happens is this… The buyers say…”hey sellers the appraisal is low and we are still willing to purchase this home if you reduce your price to the appraised value.”

Then the seller says…”wait a minute when we accepted your offer because you agreed to pay the $20,000 over list price, we think you should pay the difference!”

Now the Buyer and Seller in a re-negotiation and decisions need to be made! Do you try and split the difference with the buyers or do you reduce your price by the whole $20,000 so you can stay on track with the closing of your new home!

Now if the seller and the buyer can’t come to an agreement and the buyers do not want to or have the ability to come up with the extra cash at closing, the buyer could hold the seller hostage and not make a decision to close or terminate and get the earnest money back until 3 days prior to closing. Then you have to put your home back on the market and start all over!

So what’s the Solution? This nightmare could have been avoided if you just used “Addendum Concerning Right to Terminate Due to Lenders Appraisal”

If Option #1 is checked the buyers are making a full waiver of their right to terminate due to lenders appraisal. (This option is BEST for Sellers, but rarely checked by the buyer)

If Option #2 is checked the Buyers is making a partial waiver meaning buyer waives right to terminate the contract under Paragraph 2B of the 3rd Party Financing Addendum if:

Let’s say the list price of a home is $350,000 and the buyer agrees to pay a Seller $375,000 for the home. However the buyer says they want to limit their exposure to $10,000. Meaning they do not want to pay any more than $10,000 over appraised value.

You would take the sales price of $375,000 and subtract the amount the buyers are willing to pay in cash at closing over appraised value, in this case $10,000. So in this blank you would put the number $365,000.

If Option #3 is checked the buyer is asking for an additional right to terminate. So in the first blank is the number of days the buyer has to terminate the contract after the effective date in the contract. So as a buyer should put enough time to finish the option period and have an appraisal completed and add a few days for decision time probably 14-21 days.

The next blank #3 i is exactly like the blank in #2 ii you would take the sales price and subtract the amount the buyers is willing to pay in cash at closing over the appraised amount and that’s the number that goes in that blank.

Option #3 is probably the best solution for most the buyers and the sellers, as the buyer can limit their exposure as to how much over the appraised value they are willing to pay. The benefit to the seller is if the property appraises for less than that amount the buyer is limited as to how many days they can wait to make a decision about re-negotiation or termination.

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