Addendums are one of the most critical components of an effective negotiation!
What is an addendum? When purchasing a property, you are making a legal agreement with another individual(s). When you go through this process, everything is negotiable. Once you agree upon a purchase price of the property, the negotiation is just beginning. Addendums are used as a legal document that both parties agree to changing the terms of the deal. The document must clearly state the new agreement and both parties are required to sign.
Once both parties sign the document, the addendum will be attached to the contract. The underwriter will then use that to do run the final closing statement.
How I used Addendums on This Deal?
You can either be a good negotiator or a bad one. In real estate, you’re not the one that is doing the direct negotiation as your real estate agent does. This could be a good or bad thing. I like to negotiate and negotiate at my job on a daily basis so I prefer to be the actual one doing the negotiation.
In this particular deal there were a few things that were critical for me to negotiate on. In the first addendum I received $2k at closing to cover repairs identified during the inspection. This was a big win as I was able to take care of the repairs for around $1,200.
Here is where the true magic came in. The appraisal for the property ended up coming in low. There are a few reasons why I believe this happened. New legislature was passed not too long ago that now bids out appraisals. This means when someone requests an appraisal, the first person who responds wins. With that being said, you can get someone who does a good job or poor job. Unluckily, or maybe luckily, the appraiser for my property was bad.
What Having A Bad Appraiser Means?
Having an appraiser who does a bad job can be a very good thing for you! If used in the right way.
The appraiser ended up coming back with an appraisal price below the price we agreed to on the contract. This meant I had a few different options.
Option 1: I could pay the difference, in cash, between the appraisal amount and the agreed upon contract amount. This would require extra capital on my end at closing. Not the best option, but I have a strong cash position so it wouldn’t hurt too bad.
Option 2: I could go back to the seller and ask for them to lower the price to the appraised amount or I would walk. I have good grounds to stand on here because I don’t want to pay more for the property than the appraised value.
Option 3: I could dispute the appraisal with factual data. The appraiser would review the data and determine whether they agree or disagree. They would then proceed to make the change and I would be back at Options 1 or 2. I knew the appraisal was low by $7-10k.
I decided to send an additional addendum asking the seller to reduce the price. I had never done this before, but the worst thing they could say is no, so what the heck.
The seller came back and dropped the overall price by $5,000 based off the appraisal I sent them! Boom! Money in the bank!
That is not all, it gets better!
Why Addendum Verbiage Is Critical!
This is where things begin to get interesting. When asking my agent about the second addendum, I made sure I was clear to her that I wanted Addendum 1 to remain. This would mean I would still be getting the $2k in closing costs and the $5k decrease in price. My agent called the other agent and the agent said the seller would not give both. Here is the trick on the second addendum, shown below:
In Addendum 2, the only thing stated is an agreement to drop the price to $210k. There is no mention of Addendum 1. So from a legal standpoint, if no mention of nullifying Addendum 1 is agreed to, then Addendum 1 stands. The seller signed the document agreeing to the the drop in price. What they also signed though is agreeing to both addendum 1 and 2.
This is something the sellers agent should have made clear in Addendum 2. Addendum 1 would only be nullified if a clause in Addendum 2 clearly stated that.
Legally, we were now in an agreement for both Addendum 1 and 2 to be attached to the final contract at signing. This mistake is 100% on the sellers agent. Since the seller did not want to give the $2k at closing, the sellers agent ended up giving up $2k of their commission to the seller.
Unfortunate for the sellers agent, but part of doing business. You have to understand how to cross your t’s and dot your i’s.
- When you get a property under contract, the negotiation has just begun!
- Understand that if you have many addendums as part of the contract, you must explicitly state the status of each if you want any changes.
- Taking a bad appraisal back to the seller can end up saving you even more money! Don’t necessarily fight a bad appraisal. If you are confident the property is worth more, then use the bad appraisal to your advantage in getting the price even lower!