Home Appraisal Came in Low: Now What?

[fe2o3ez]

So, by the nature of this site, it is safe to assume that many of you are the analytical, left-brained, fact-driven person similar to me. Let's see how you would react to this one...

I am set to close on a house purchase in just under 5 weeks, except for one problem. My lender's appraisal came in at $10k below the agreed purchase price. I studied the appraisal for a couple hours, both agents studied the appraisal, and called the appraiser, but as hard as we tried, we could find nothing wrong with his comparables, or his logic. The problem? The seller still insists that we pay the original agreed-upon price.

Now, as a personal rule, I don't pay a premium for anything. If I can negotiate a discount, I do. I feel that most things are overpriced as it is, so negotiating 10-20% is getting us back to where the price should be. Therefore, you can imagine my first reaction when being asked to pay a $10,000 premium (out of pocket)above what the facts showed to be the value .

The property is beautiful, it is in a great neighborhood, and 2 days ago, I was willing to pay the purchase price. However, I now know that it is worth $10k less than I thought\agreed originally, which doesn't change my thoughts on the property, it just changes what I would be able to get from the property if I had to - for whatever reason - turn around and sell in the short term.

If I were governed by emotions, I would say we cant live w/o the property and we have to have it, then come up with the extra money and pay it. But I am instead a fact-driven individual, and thus have a hard time paying more than i can prove it to be worth.

(by the way, we tried to negotiate a settlement with the seller, and he won't budge a nickel, so it is all or nothing)

What would you do?

[NetSkyBlue]

Is it worth it to you to not have to go through the hunting process all over again, knowing you may not find something comparable in features or price anytime soon? If yes - walk away. If not, put down the price you thought was acceptable before the appraisal came in.

[disneysteve]

Originally Posted by fe2o3ez

I am set to close on a house purchase in just under 5 weeks, except for one problem. My lender's appraisal came in at $10k below the agreed purchase price.

The seller still insists that we pay the original agreed-upon price.

I now know that it is worth $10k less than I thought\agreed originally, which doesn't change my thoughts on the property, it just changes what I would be able to get from the property if I had to - for whatever reason - turn around and sell in the short term.

What would you do?

I totally don't see a problem here. To you, the house is worth what YOU are willing to pay for it, not what some appraiser says it is worth. Clearly, you felt it was worth the price you offered or, presumably, you wouldn't have made the offer. The appraisal in no way changes that.

I'm not sure why you are concerned with the potential short-term resale value.

And of course the seller expects you to pay the agreed upon price. That's what "agreed upon" means, isn't it?

[MonkeyMama]

Personally I would probably care less about the appraisal. As others said, there is a hassle factor of starting the home search over again.. & clearly you were willing to pay the agreed price. (& on the flip side, there were so many appraisals that were wrong and fraudulent when times were good - it never meant much to me).

So how does the lender feel about this? OR are you paying cash? I mean it doesn't really matter what you think - it could jeopardize any potential mortgage loan?

All of the above said, from a negotiating standpoint, I would consider walking away. Personally, I think the sellers are dumb not to budge. Selling a house that has appraised for $10k less is a tough sell, and most lenders will take issue with that. I'd be tempted to walk away and call their bluff. But I am not in the situation so is harder to read from afar. I could also see the flip side that it doesn't really matter, *I LOVE the house, it's perfect for our needs, and why risk losing it?* In this type situation I have walked away many times and WON! When it was clear the seller was just way unrealistic. BUT, not when it comes to a house. Both sellers and buyers get very emotional when it comes to a house - so I'd be less optimistic that would really work. I know too many sellers who rather their house sit empty for years and go broke than sell at the true market value. So the thought crosses my mind to call their bluff, but maybe they aren't bluffing.

[snafu]

Wow, your agent really dropped the ball. Before writing an offer your agent should have presented at least 4 or 6 com parables to determine what pricing was appropriate. What were the terms and conditions of your offer? Was it based on obtaining appropriate financing? Can you walk away with your 'earnest' money?. Have you had the house inspected by a licensed inspector who found no issues? The seller's realtor/agent needs to brig some reality to that client.

Personally, I'd walk away and see what the seller does next

[jpg7n16]

Originally Posted by fe2o3ez

So, by the nature of this site, it is safe to assume that many of you are the analytical, left-brained, fact-driven person similar to me. Let's see how you would react to this one...

VERY left brained person here

what is the selling price of the home? so it's 10k - is that materially different?


There's a difference in a $10k valuation swing on a $90k property, and a $10k valuation on a $360k property. On $90k, it could be a renegotiating point. On $360k, it doesn't matter. Also, if it was a multiple offer situation, it doesn't matter. A new bidding war could easily raise the price $10k+.

In the end, like DS said, market value is just that - what a willing buyer will pay in a fair market. You're a willing buyer, the home is worth more to you than other people thought it was worth. That's why you're the high bidder.


I heard once that it's the nature of an auction market: whoever ends up buying the item - everyone else thinks that they paid too much.

[MonkeyMama]

Originally Posted by jpg7n16

VERY left brained person here

what is the selling price of the home? so it's 10k - is that materially different?


There's a difference in a $10k valuation swing on a $90k property, and a $10k valuation on a $360k property. On $90k, it could be a renegotiating point. On $360k, it doesn't matter. Also, if it was a multiple offer situation, it doesn't matter. A new bidding war could easily raise the price $10k+.

This is a good point. The $10k seemed "eh" to me, but homes are insane expensive where I live and insanely bid up. So, $10k really would be *nothing.*

If the house is a $100k house, $10k is pretty significant. MEaning, I'd be more likely to keep looking in that case.

[disneysteve]

Originally Posted by MonkeyMama

If the house is a $100k house, $10k is pretty significant. MEaning, I'd be more likely to keep looking in that case.

I would agree with you if you were just in the shopping phase but OP already submitted an offer on the house that was accepted by the seller so there was a contract at that price. That means OP felt the house was worth the price. Backing out now just doesn't seem right.

[feh]

Originally Posted by disneysteve

I totally don't see a problem here. To you, the house is worth what YOU are willing to pay for it, not what some appraiser says it is worth. Clearly, you felt it was worth the price you offered or, presumably, you wouldn't have made the offer. The appraisal in no way changes that.

I'm not sure why you are concerned with the potential short-term resale value.

And of course the seller expects you to pay the agreed upon price. That's what "agreed upon" means, isn't it?

Ditto. The bank was doing its due diligence in getting the appraisal. Whatever that number happens to be is not relevant.

The only number that matters is the one you agreed to with the seller.

[MonkeyMama]

Um, I have never bought a house where the final sale wasn't contingent on an appraisal for at lease the agreed upon value. That's generally part of the contract. This whole series of events probably makes the contract null and void. Meaning, the seller should know what they are getting into when they accept an offer. An offer has all sorts of conditions. This is simply a failed condition. I definitely would have no qualms walking away in this situation. Should be what they agreed to. (Though who knows what OP exactly agreed to).

P.S. It's kind of relevant to get approved for the mortgage? No mortgage, no purchase. For most people. The average person would lose their loan in this situation. The contract would be void.

[disneysteve]

Originally Posted by MonkeyMama

Um, I have never bought a house where the final sale wasn't contingent on an appraisal for at lease the agreed upon value. That's generally part of the contract. This whole series of events probably makes the contract null and void. Meaning, the seller should know what they are getting into when they accept an offer. An offer has all sorts of conditions. This is simply a failed condition. I definitely would have no qualms walking away in this situation. Should be what they agreed to. (Though who knows what OP exactly agreed to).

P.S. It's kind of relevant to get approved for the mortgage? No mortgage, no purchase. For most people. The average person would lose their loan in this situation. The contract would be void.

If that's the case, then the question is irrelevant as the contract would be voided. Either the seller needs to lower the price to match the appraisal or OP needs to cancel the deal and walk away.

[bjl584]

If you aren't happy with the agreed on price due to a low appraisal, then you have the option of walking away and finding another property. You may lose your earnst money if the seller decides to keep it though.

[wincrasher]

The appraisal is now part of the record. It's going to come up with the next buyers if you walk away. The seller would be smart to lower his price and close the deal.

I would walk away. That's why contracts are contingent on the financing. Same as the home inspection - you see something that makes you uncomfortable, then you have leverage to renegotiate or get out.

Buying over appraisal is just crazy in today's market. There are thousands of houses out there - pick one that's a better deal.

[Mr Tipps]

In my opinion I would still go ahead and buy it! If you were buying purely for investment purposes then I would re consider, as when you are buying investments you are looking to make some money in the near future.

When it comes to a house that you live in what price can you put on that? If it ticks all the boxes you should be happy! Remember an appraisal is not a true reflection of what you would get for the house. They are generally put in place to protect the banks in case you default so they can make their money back! I have been investing for many years and I have yet to agree with a banks valuation on any of my properties - and have proven them wrong many times when I sell them.

If you can afford the extra 10k - buy it and start enjoying it!

[jpg7n16]

Originally Posted by disneysteve

I would agree with you if you were just in the shopping phase but OP already submitted an offer on the house that was accepted by the seller so there was a contract at that price. That means OP felt the house was worth the price. Backing out now just doesn't seem right.

Then why bother getting the home appraised? Or if just for financing reasons, why disclose the apprasial amount? It's just gonna piss off the buyer or seller.


Although, I guess it doesn't really matter. On the vast majority of properties, a +/-$10k difference on the appraisal isn't that big of a deal.

[Money Gal]

What was the offer price? What % over/under appraisal would make a difference to me in determining whether it is a material amount.

Normally your offer contract would be contingent on the appraisal, so you can terminate the contract when the appraisal comes in low & not lose your earnest money. Offer contingencies are exactly that, contingencies that give you a legal out on material issues that affect the perceived value of the home.

The appraisal value is what the bank will loan against, so if you proceed with an offer above appraisal you will have to come up with some additional cash at closing to cover at least 20% of that difference.

Are there any unique features about this home that the comparables did not have that makes it worth +$10K to you? Like on a cul-de-sac, specific schools, bus line nearby, neighbors with similar age kids, close to family, Central AC in this home but not in comparables - all that sort of stuff.

Personally, unless there was something extremely compelling about this specific property I would tell the Realtor that I am terminating the contract unless they come down in price to match (or close to match) the appraisal since that is the true market value of the property today.

Have you done any research on the seller's position on the property? I like to look up their purchase price & year and their mortgage value so I know whether they have negotiating room or not. If it is a paid off property there is room for negotiation & they are just being difficult if they do not budge on price. If their mortgage is higher than or at sale price, then they have to bring money to the table and may not have any option to go lower on price (like they might opt not to sell at all in that case).

Also, have you had the property inspected yet? If they won't budge $10K on price based on appraisal, they probably will also refuse to correct any deficiencies.

Good Luck & unless there is something about this property that makes it highly unique for you, I would prepare to walk away.

[fe2o3ez]

Thanks to each of you for your variety of responses. I value the discussions in this forum and enjoy following all the stories about money – good and bad. As a result, I thought I would treat you all to an update, if you have continued to follow the thread. First, though, let me respond to a couple comments:

1. $10,000 represents 2% of the purchase price. Since we are putting 20% down, that leaves us with an additional $8000 to produce in 5 weeks. The amount isn’t horrible as a portion of the purchase price, but to produce the cash in a few weeks, without tapping our EF, or long-term savings would require some creativity.

2. Yes, I recognize that the market for a purchase is set by the price at which both a buyer and seller can come to agreement – but that only works in a CASH market. When you need to involve lenders, as in most home purchases, the funding is contingent on the appraised value of the property. If the lender doesn’t get the purchase price appraised, it limits cash to the buyer, and the buyer must produce more cash, negotiate the difference or walk away. I’m not as concerned with what it means to me as a buyer, as I am what it would mean to me as a seller, if I were unfortunately forced to sell in the short term (job loss, death, lottery winnings, etc.). How long would it take for me to re-capture the additional money from the home’s value?

3. The house was inspected, and only relatively minor items came of it. They have been resolved, and this appraisal was the last hurdle. (My loan was already approved.)

4. Yes, I looked into the background of the property and any information I could gather about the seller’s position. It would seem that they should be in a very good cash position, but there was a re-financing a couple years ago, and they may have pulled equity. They are supposedly building a retirement home, so they may have used equity to begin that process.

We made some phone calls, and determined the discrepancy in the appraisal – some information that was new to me, but you may find helpful or interesting. The property contains a detached 3-car garage with a fully furnished apartment above it, about 740 sq ft of living space. When I reviewed the appraisal in detail, I found that this was excluded. I called, and was informed that this is standard appraisal guidelines for detached units of this sort. Because it is not technically considered a portion of the main property, you are not allowed to include it as part of the appraisal. (of course, the house was marketed with sqft inclusive of the apartment, and our evaluation of the property certainly considered the advantages of such property.)

When I ran calculations for the value of the additional property, based on the per sqft appraised value of the main property, it adds over $100k of value to the property. Of course, detached apartments don’t carry equivalent per sqft value, but even at 50% or 25% of the per sqft, this is a pretty good deal for $10k. Also, you need to remove from that $10k difference the incremental costs of starting over with the property search and acquisition process – new loan, potentially higher interest (I locked in at 3.875%/30), additional appraisal and inspection fees, etc.

Plus, the apartment adds a utility for us that we weren’t finding in most houses. We have extended family that will be living with us, and the apartment is a great fit for them. With that information, it becomes a no-brainer, as we should re-coup the extra value quickly.

It just took me about 24-36 hours to get past the emotional side of the negotiations. I had resolved in my mind (and on paper) that the money made sense. But the fact that the seller refused to budge one nickel, when both we and our realtor were trying to work with him – that rubbed me the wrong way. No big deal. I put on my big boy pants and agreed to make up the difference, so we are back in business.

[LivingAlmostLarge]

Great you can afford the extra $10k cash. Lots of buyers couldn't. Hence why appraisals typically are the selling price because the banks won't lend more.

[Mr Tipps]

Great - I hope you enjoy your new home!!

[jpg7n16]

Originally Posted by fe2o3ez

1. $10,000 represents 2% of the purchase price.

... so we are back in business.

2%, (or $10k on $500k) I wouldn't bat an eye. Chalk it up to variance in the appraisal figures. Not worth renegotiating the whole $500k deal.

I'm glad you proceeded, I think it'll be a good deal for you. Congrats on the new place!