Home Appraisal Came in Low: Now What?

[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]

** Update **

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]

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!

[disneysteve]

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!

I agree. I bet if you brought in another independent appraiser, they'd come up with a different number.

As I said initially, if the property's value to you is what you offered to pay, and you have the money, go for it. It sounds like a great deal. Congrats.

[snafu]

Now that you've overcome an unexpected hurdle, I hope the rest of the process, closing, move goes smoothly. Enjoy your new home