Appraisal Well Below Purchase Price

10 Replies

Hi BP I am stuck between a rock and hard place and was hoping someone has some advice or experience in the following situation.  

I had an offer accepted on a Duplex for $350,000 and already went through all the inspections and re-negotiations with the seller.  While the loan was in Underwriting the appraiser did the official report and appraised the property at $305,00.  The property brings in $3,200/month in rent and I had no problem agreeing to the asking price of $350,000.   

After talking with my agent it seems the ball is out of my court and the seller either has to bring down the purchase price to $305,000 or walk away from our agreement.  What can I do to ensure the deal doesn't fall apart? Is it possible to get a second appraisal?

In hot markets buyers are also expected to pay cash for anything above the appraisal price if the bank won’t lend on it. If you’re able and willing that could be an option.

You could also ask if they’d order an appraisal review.

What do you see that the appraisal missed that makes this worth paying extra for? Without much detail... 3200 monthly rent seems to align closer to the appraisal price vs the 350k.

Hello @John Whitridge :  

I was in a similar situation recently.  And I too was happy paying the original price as the numbers worked well.  The issue is how much you can borrow to buy it and whether you have the extra cash to kick in to finance it and if the deal still makes sense with the extra cash in.

I had several options (which apply to you as well):

1.  Lower the price to the appraised value (rejected/declined - I actually didn't have to present this as they made it clear they weren't coming down);

2.  I finance based on the appraised value and the seller finances the remainder (they would hold a note for the difference);

3.  I kick in more cash which didn't make sense at that point.

After going back and forth for maybe a month the seller agreed to split the difference.  They lowered the price by about 5% and I kicked in the extra cash.

Bob

Same situation just happen to me a few days ago.

Original Purchase price: $350,000

The appraisal came in at $335,000.
$15,000 lower than the contract price.

I told the seller that, I will pay $4000 above the appraisal price.
I sent an addendum to the seller for a new price of $339,000.

The seller accepted and signed it two days ago, and we are go to continue our loan process.

I’m glad that the appraisal came in $15,000 lower, so it just saved me $11,000.

Thanks everyone for the input I really appreciate everyone's advice I definitely have some more options than I thought which is nice.  

@Matt K. The rents are actually below market rents and have lots of room to be increased to pull in $3500-$4000 a month which would make the deal at or above a 1%.  Even if the rents are not increased it is pulling in a good amount more than it would be costing me and the numbers work well. 

Originally posted by @John Whitridge :

Thanks everyone for the input I really appreciate everyone's advice I definitely have some more options than I thought which is nice.  

@Matt K. The rents are actually below market rents and have lots of room to be increased to pull in $3500-$4000 a month which would make the deal at or above a 1%.  Even if the rents are not increased it is pulling in a good amount more than it would be costing me and the numbers work well. 

 what would it take to get the rents to market rate though? Again, I don't know your property but I'd imagine it'd take something and likely can't be done for free. You'd probably also have turnovers/vacancy to consider... even more so in these winter months (if the leases are m2m).

@John Whitridge

You can get the seller to come down on price. Do you have an appraisal contingency in your contract? 

If they won't come down on price, you have to make up the difference. They don't have to come down all the way on price, maybe meet them halfway?

Alternatively, you could get a different lender. The same lender can't order a different appraisal just because you or they are not happy with what it appraised for (at least in my state that's how it works).

I don't quite understand appraisals. Someone in the free and open market is willingly paying $X but an appraiser comes in and says it is worth less than someone is FREELY willing to pay! 

I don't see much reason to pay over an appraisal.

You also now have the exact leverage you need to negotiate the lower price.

just my opinion, I try not to pay more than what a unit costs. Sometimes hot markets can cause disparity between appraisal and demand, but finding deals is the talent, anyone can buy any unit if you're willing to overpay.

Originally posted by @Luka Milicevic :

@John Whitridge

You can get the seller to come down on price. Do you have an appraisal contingency in your contract? 

If they won't come down on price, you have to make up the difference. They don't have to come down all the way on price, maybe meet them halfway?

Alternatively, you could get a different lender. The same lender can't order a different appraisal just because you or they are not happy with what it appraised for (at least in my state that's how it works).

I don't quite understand appraisals. Someone in the free and open market is willingly paying $X but an appraiser comes in and says it is worth less than someone is FREELY willing to pay! 

Thats all well and good John, except in this case, the buyer is asking someone ELSE to lend them the $... and use that asset as collateral.  If that asset isnt "worth" the needed amount to collateralize, then... trouble