As a real estate agent, your job is to look after your client’s interests. That means explaining the pros and cons of every potential deal, including offering your own opinion. This is especially important when you believe a client is at risk of making a bad purchase.
Here are some situations when it may be appropriate to strongly advise a client to ditch a deal.
Seller demands an appraisal clause
If the listing agent demands that the buyer commit to the purchase even if the appraisal comes in below the sales price, that’s trouble. A bank will usually only offer a loan to cover the appraised value of the home, so if the appraisal is lower than the sales price, that means your buyer has to make up the difference in cash. Obviously, it’s not good to buy a home for more than outside authorities believe it’s worth. In addition, the buyer might not have the cash to cover the gap.
In some cases, a buyer who really loves a home and has enough cash on hand might be willing to accept an appraisal clause. But you should try to demand limits, such as offering to make up a gap of up to $5,000 but no more. Otherwise you could be writing the seller a blank check!
A good home inspector will usually find a few things that could use a little work. That’s to be expected. What’s important is that they don’t find any major problems, such as issues with the foundation, an electrical or plumbing system that needs to be replaced, extensive water damage or a termite infestation. It’s important that you explain to your client the risk they are running by owning a home with major issues. Spell it out in terms of the money they’ll have to spend for repairs.
Appraisal comes in way below the offer
You may have overbid if the appraisal comes in far below what your client is offering. In some cases, you may be confident telling your client that the appraisal is not reflecting the home’s market value. For instance, appraisals will sometimes undervalue properties in areas that are up-and-coming, and which will likely rise significantly in value in the coming years. But in general a low appraisal means it’s time to renegotiate or walk.
There’s not much you can do besides walk away from a deal if a lender won’t agree to lend your buyers the money they need to get the home. In some cases, a lender may be willing to make a smaller loan, insisting that the buyers put down an even larger down payment. You should strongly advise your clients against cleaning out their savings just to get the house and encourage them to consider less expensive homes.
Second thoughts about the neighborhood
During the option period, it’s a good idea for your clients to get a sense of the neighborhood they’re going to be living in. Check it out during the day, at night, on the weekends. As they walk or drive around, they may realize that it’s not the place they want to spend the rest of their lives. It’s far better to walk away than to live in a place they may never come to love.