Most markets across the country are plagued with a drought of listings and flooded with competitive multiple offers. Not all offers are created equal, the listing agent job is to guide the sellers in making the right choice.

Recently, I’ve received offers with the following clause on the financing addendum: “Home to appraise at or above agreed purchase price. Buyers and sellers agrees to renegotiate terms if home doesn’t appraise at agreed value. If no agreement is made, Buyers or Sellers can cancel contract with buyer receiving all earnest money back.”

The first time it happened, both my seller and I were surprised. The buyer is in finance, and is an investor. His first offer came in very low, eventually he inched up, but we were still not agreed on price. His agent said, “He doesn’t want to overpay.” That clause killed negotiation. The seller has a relocation opportunity, and can’t risk the transaction falling apart a week before closing. They feel that the buyer doesn’t really want their home, will be a nightmare throughout the process, and declined his offer.

Twice the next week I got offers with the same clause, all from the same brokerage. I called the agent and asked him what is up with that clause. He said, “it’s because we see so many low appraisals. We just want to keep the dialog going.” 

That isn’t what it says. Negotiation can be a gusty wind to the stratosphere in multiple offers. The winning buyer sometimes wakes up in a cold sweat regretting their win. That clause gives them the assurance that their offer will be backed by an appraisal. The agent is protecting his clients. Or, is he/she?

Once the seller gets over the instant elation of a highest and best offer, they want to know that offer is not going to plummet to the ground. They want to know that the buyer has reserves to cover a potential gap. With FHA, that appraisal sits on the house for any other FHA buyer for 6 months. Last year a buyer had an accepted offer that came in $4000 short with an FHA appraisal. The seller said, “Too bad, pay up or it goes back on the market.”  He didn’t have extra funds, and the seller canceled our offer to put it back on the market. That property sold four months later at $7000 less than we offered.

We have to look at why 25% of appraisals are coming in low. Agents have to know market pricing, and when an offer is out of line. Allowing a buyer to make an offer that they can’t back up is irresponsible. Sellers can’t make up prices, listing agents need to know the condition of the homes that they represent. That clause protects the buyer from themselves but puts 100% of the risk on the seller. How would you respond to that clause?