Purchase Agreement Terms

[Jacob Elbe]

Hello All!

So I'm still new to REI, but I'm in the process of trying to buy a property through a turn key provider in the Cleveland, OH area. I own one other property, but bought it as my primary residence, so I have no experience with the kind of Purchase Agreement that's involved in the deal. Specifically I have a question about a part of the agreement that talks about the appraisal.

I know the property has been rehabbed and that appraisals often come in below the asking price. I'm okay with that, but I would expect that is the appraisal comes in below the asking price at all, I would have the opportunity to back out of the deal, or the seller would have the option to drop his asking price. In this agreement it says (paraphrased):

If the appraisal comes in at 93% of the asking price or higher, then the purchase agreement is still good. If it comes in at less than 93% of the asking price, then I have the option to back out and get my deposit back, or we can negotiate the selling price.

That seems strange to me because it could mean an extra $4k to $5k in cash I need if I'm locked into the deal and the appraisal comes in at the 93% to 99% area. Is this normal? Should I try to negotiate this out of the purchase agreement? I would be a lot more comfortable with it saying something like:

If the appraisal comes in below the asking price at all, then I have the option to back out or the seller has the option to drop the asking price.

Is that ever the case? Thanks for any help you all can offer!

[Chris Clothier]

@Jacob Elbe -

I have never seen such a clause in a contract although in a market like Cleveland, OH. I can understand the company using this clause. That does not mean I would sign it. IMO, I would ask for that clause to be eliminated before you sign the contract and if they do that, let them know you will be willing to listen to reasoning behind continuing to close at original contract price if and when it appraises low.

There are a lot of midwest cities that have been wracked with foreclosures where even the appraisers will tell you it is a complete guess as to what a property is going to appraise for. The company you are buying from could be using a clause like that for any number of reasons including if they are simply too small to risk a buyer backing out at the last minute. That does not mean they are deliberately trying to over-price a property as so many posters without even the knowledge of who you are dealing with want to suggest. Of course, that could be exactly what they are doing.

The only way to find out is to ask the company to treat you fairly as a buyer and remove the clause and you will treat them fairly and consider their reasoning for asking you to close if it appraises low. If you decide not to close, your earnest money should not be at risk. If you decide to ask them to lower the price, they too have the option to not come down and terminate the contract without keeping your earnest money. That way your earnest money is not at risk and you are not locked into something without having full knowledge of the appraised value. That is the way a reputable company will approach this situation.

Don't automatically assume the worst, but do not be foolish either. That clause does not help you as a buyer and should be eliminated before you sign.

Chris