What’s all this about Seller Protections and Appraisal Guarantees?

I recently read an article in our local Business Journal about the quick upward spike in home prices here in Denver, and markets like it, around the country.

When we see the conditions known as a “seller’s market” we begin to notice interesting techniques employed in the home purchase process – usually in additional clauses in purchase contracts, that benefit the seller.

I have been a certified real estate appraiser in Colorado for over 20 years and remember the last boom like this in the mid 1990s.

The difference is that there was a lot of inventory last time, because everyone was trading up. The lack of inventory today has resulted in multiple above-list-price offers being received within days of the the property hitting the market.

The marketing days for most homes under $400,000 is less than 5 days which is far below even the 24 days that Molly quotes in her story. Brokers are writing offers that they know will get their buyer the contract. Because a majority of offers the seller receives are above the listed price, the buyer needs to add something else to entice the seller to accept their offer. This is how the GUARANTEE to purchase REGARDLESS OF APPRAISED VALUE comes in.

You see, banks won’t lend more towards a home than the appraised value (when combined with your down payment). So, if the appraisal comes in at an amount below the contracted price it becomes the buyer’s duty to make up the difference, if they want to buy the house. This so-called “Appraisal Guarantee” makes the seller comfortable that the buyer will “come to the table” with the additional funds, from whatever source, for the closing of the purchase.

But here’s an interesting insider tip, especially for sellers, about this technique:

A contract clause like this is not a big deal when talking about conventional loans. But the one place you WON’T see this is in an offer where the buyer is financing with an FHA loan. This should also be a red flag for the seller for one big reason:

The appraised value “sticks” to that property for ninety days in the FHA system.

This means that the property CAN NOT be sold with an FHA loan for more than that appraised value for the next ninety days.

If I was selling a property and had an offer at $10,000 over the listed price with a conventional loan and an “appraisal guarantee” VS an offer of $15,000 over the list price with an *FHA* loan, I’m going with the conventional loan offer!

These topics are complex and often confusing. That’s why we help home buyers and sellers learn what they need to know to buy a GOOD home, and do it WELL, here at REOT.


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