Weighing Defensive Clauses, Offensive Clauses — & No Clauses
[Editor’s Note: Nothing in this post or on this blog should be construed as offering legal counsel. If you require legal advice, please consult an attorney.]
“Home must appraise at or above sale price. If appraisal is below that amount, Buyer shall have the right to renegotiate this contract.”
–“Custom” Financing Addendum clause
With sparse recent closed deals to price off of, continued (very) tight inventory locally, and the specter of widespread multiple offers looming, the risk of “For Sale” homes under contract failing to appraise is back on Twin Cities Realtors’ minds this Spring.
To protect their clients, some Buyers’ agents are now inserting defensive language (like the one above) into the Financing Addendum, specifying what happens if the home doesn’t appraise.
Specifically, the added language explicitly gives the Buyer the right to renegotiate the deal at a lower price if the home doesn’t appraise — and the right to back out if the Seller refuses.
Why do (at least some) Buyers feel that it’s necessary to add such language?
Because — at least according to the default language in the standard Financing Addendum — a financially strong Buyer may still qualify for a mortgage even if the appraisal comes in low.
Which means the Buyer is obliged to proceed with the deal regardless.
(Note: at least in theory, Sellers can go to court to force Buyers to buy in a legal action called “specific peformance.” But I’ve never seen or even heard of such a case. More commonly, the Seller retains some or all of the Buyer’s earnest money as liquidated damages).
Spooking Sellers
Why shouldn’t all Buyers avail themselves of such an escape hatch?
Because for one thing, some Buyers may not need it: if a low appraisal effectively torpedoes the Buyer’s mortgage, the standard Financing Addendum will get them out of the deal.
For another, such an escape clause is moot if the home does appraise (still the likelier scenario).
Meanwhile, insisting on such a defensive clause is sure to spook Sellers, who: a) don’t want to focus on financing risks to the deal; and b) don’t want to see that their Buyer is, either.
Multiple Offer Considerations
For all those reasons, especially in multiple offers, adding such protective language can be seen as weakening the offer — possibly tilting the Seller to another Buyer.
Which is why — at least in my opinion — savvy Buyers in multiples are smart to stick with the basic Financing Addendum language, requiring that the Buyer furnish the Seller with a firm underwriting commitment (typically within about two weeks after the Inspection Addendum is removed).
Buyers who want to make their offer even stronger can go further, by adding a clause to the effect that Buyer will forego the right to renegotiate the deal if the appraisal comes in low, and compensate for any appraisal shortfall by boosting their downpayment.
Assuming, of course, that they can . . .
