When offering 10% over list price, accepting the property as-is with no inspection, and paying my own buyer’s closing costs, how is it possible that the seller does NOT sell their house to me?!
Unfortunately, this is a common question among buyers in the 2020 real estate market. Why is this happening? How can we secure a property?
With record-low interest rates, there has been an influx of buyers. With housing inventory still low, multiple offers are often commonplace.
An unforeseen complication that 2020 has produced is “funny money” clauses. To secure a property, escalation clauses and statements of guaranteed appraisals are being used. Many agents advise buyers to use escalation clauses that state they will pay $1,000 more than the highest bid. These clauses create an ongoing bidding war, allowing sellers to pit buyers against each other.
The guaranteed appraisal clause is then used to lock in the inflated price. In theory, this is great for the seller, as buyers have to pay the purchase price regardless. However, what is lost in translation is that the buyer then has to pay their down payment, closing costs, and whatever this unknown additional amount is between the appraisal and the purchase price.
This additional amount of money is not discovered until the appraisal is completed. The appraisal is typically completed 2-4 weeks after the purchase agreement is signed. Guess what? Frequently, buyers do not have sufficient additional funds to cover the difference between the property’s appraised value and the agreed-upon purchase price.
They need the full loan amount to purchase the home. If they had enough money to put more down, they would likely choose a different loan program or pay cash in the first place. This scenario results in properties being sold at inflated prices, and both buyers and sellers are disappointed a month or two later when the deal falls through because the home did not appraise for the purchase price.
So how do we address this? The Joyer Home Team has been addressing this dilemma one deal at a time by educating all parties involved – buyers, sellers, listing agents, buyer agents, parents of clients, and more – with relevant, up-to-date information on how the real estate process unfolds.
We advise our clients against using “funny money” clauses. With over 65 years of combined experience in the business, we remind ourselves that not everyone has been through these changing markets. Though 2020 has been tough. We are standing strong to help you navigate these real estate market conditions. To date, we have helped over 60 families with their housing needs this year. We’d be happy to help you with yours, too!