What are my options if the appraisal comes in low when I've already agreed a purchase price with the seller?
The seller and I agreed on a purchase price ($349,000) and I'm going to put 20% down, but the appraiser mentioned the value will probably come in low because of a few foreclosures in the neighborhood.
Do you have a realtor? It will depend on how your contract reads. Most purchase contracts are contingent on the home appraising for more than purchase price.
If you do have a contingency, you would then negotiate in most cases with the seller for them to drop the price. If they won't you would either borrower more than 80% of the value OR you can put more money down to get to 80% LTV.
If there is no contingency, you would either bring more to close or have less down payment, which would mean either monthly PMI or you can pay for the PMI in one lump payment up front.
First thing, get your contract and read it very carefully and you should find your answer.
| 10.14.13 @ 19:15
Joseph, another option would be to challenge the validity of the appraiser's valuation. I have experienced more appraisal issues in the past 6 months than I have in my entire career. Some lenders only use those that are on their "approved appraisers" roster. Unfortunately what this actually means is these are appraisers who consistently lowball property values, thereby reducing the risk exposure of the lender.
If the purchase price is truly in line with market values and the appraised value came in 10% or so below expectations, you can potentially win the argument to get the appraisal omitted and order a new appraisal.
Naturally, these adversely affects your closing schedule, but if, as Dimitrios suggested, your appeal to reduce the seller's price fails, this is your next best option. PMI should be your last act of desperation. Feel free to contact me for specifics on this appraisal strategy. I've dealt with it MANY times in the past few months.
I wish you all the best!
| 10.14.13 @ 19:39
Hi Joseph. There's several areas to consider here. Was this home listed on the MLS? Did you have a buyers' agent, and if so, did he/she do a CMA (Comparable Market Analysis) for you highlighting sales of nearby similar homes? If so, it should have helped you see whether the agreed on price was realistic. You don't mention agents in your question, which lead's me to wonder if perhaps this is a FSBO (for sale by owner) situation. I've seen many of those where the sellers don't really have a great handle on their homes' values, and sometimes buyers don't either.
I find it a little odd that "the appraiser mentioned the value may come in low". In my experience, appraisers don't interact with home buyers, particularly if a lender orders the appraisal (which is always the case if you're taking out a mortgage). Also, appraisers are supposed to use "comparable sales" to determine market value. A foreclosure is a "distressed sale", which is typically not used to determine the value of a "non-distressed sale" (a home sold on the open market, not a short sale/foreclosure/etc).
As the buyer, if you have a standard sales contract with the appraisal contingency, a low appraisal means one of four things happen: The seller lowers his price to the appraised value (which is best case scenario for you); you agree to pay the appraised value despite the low appraisal (which means you need to bring the shortfall amount to closing before any of your funds count towards the down payment); you and the seller agree to a reduced sales price (see the prior option); you and the seller don't agree and your earnest money is refunded.
I've have purchases end up with all 4 outcomes over the years, I am closing a Florida deal next week that appraised for 222K with a sales price of 225K. The seller wouldn't reduce his price, buyer wanted the condo so is paying the 225K. In their case, the down payment was 100K, so the slight difference between the appraised value and sales price didn't affect the loan in any way.
Hope that helps, Ted | 08.30.15 @ 05:31