Trying to understand lending when property appraised below contract price

Fort Lauderdale, Florida
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Trying to understand lending when property appraised below contract price

Sam Leon
Investor · Fort Lauderdale, FL · Member since 2012 · 1k+ posts · 465 votes

I have a situation where the property I have listed appraised below contract price.

This is a condo unit in south Florida with an HOA.

As an example, the contract price is 250k, there is an adjacent condo that recently sold for 235K.  There is no other recently sold data point to use, that condo unit is the only single data point.  The buyer's lender ordered an appraisal, it came back with the 235K number.

I had mentioned to the appraiser that the adjacent unit that sold for 235K sold for that number for good reasons. The owner is in Europe and wanted to get out quick, it has deferred repairs and maintenance issues, it was listed on the MLS and sold to a cash buyer sight unseen in less than one day. But the appraiser did what he did and came back with the same price. Fine.

My understanding with conventional lending is, if the appraised price is 235K, then the lender will typically approves up to 80% of that which is 188K, this means the buyer will have to pay 62,000 of down payment to make up the difference to the contract price.  In this case, the buyer is paying a high down payment of 40% (100K) on the contract and asking 150K from the lender, which in my mind should cover more than the difference between the appraised value and contract price.

But I was told that is not how this works.  In this case, the lender has asked the buyer to put up an extra $15000 (the difference between contract and appraised value), which prompted the buyer to ask for a price reduction because of the extra "out of pocket" cost to buyer.

I am trying to understand this, because I did some asking around, and no one can explain this to me, why would the lender ask for extra money from the buyer to cover the difference if the buyer already has a high down payment that more than cover the difference?  The explanation I got is this is a complicated algorithm and unrelated to the down payment.  So I guess I am trying to understand how this works or is this just voodoo math?

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Stephanie MedellinBusiness Member
Mortgage Broker · CA · Member since 2014 · 1k+ posts · 642 votes
3y

Just reading your question again -

Say the buyer is still paying $250,000 and putting $100,000 down.  Originally that was 40% of the property value, but now the property value is only $235,000.

$15,000 of the $100,000 is now going to cover the difference between the value and the purchase price, since the lender won't lend on that.

Now the buyer has $85,000 left of the original $100,000.  That's 36.17% of $235,000.  So the buyer's down payment is 36.17%, not 40%, and he's paying the $15,000 difference in cash.

I hope that makes sense.

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  • Stephanie MedellinBusiness Member
    Mortgage Broker · CA · Member since 2014 · 1k+ posts · 642 votes
    3y

    @Sam Leon It's pretty straightforward and virtually all lenders follow the same guidelines - even hard money or investment purpose loans. The loan-to-value (LTV) ratio is based on the lower of the contract price or the appraised value. In this case, the LTV will be based on the value of $235k and the buyer will need to bring in the difference.

    If they are putting 40% down, they need to put down 40% of $235,000 (which is $94,000), plus the additional $15,000, for a total of $109,000.

    They can also put a lower % of the appraised value down, and the loan terms will be based on that LTV. With condos, depending on whether they will be occupying it as a principal residence or using it as an investment property, there is less scrutiny on the HOA at different LTVs. If it will be a primary residence, they can put as little as 3% down. It doesn't have to be 20%. But the % will always be based on the appraised value. If they put 3% down, that's $7,050, plus the additional $15,000, unless you agree to lower the purchase price.

    While the appraiser may have given the most weight to the sales price of the adjacent condo, they always use more than 1 comp.  They will use comps from other complexes.  They can't based an entire appraisal on only one other sale.  

    The buyer could try disputing the appraisal if the appraiser didn't make proper adjustments for condition. 

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  • Robin SimonBusiness Member
    Lender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
    3y
    Quote from @Stephanie Medellin:

    @Sam Leon It's pretty straightforward and virtually all lenders follow the same guidelines - even hard money or investment purpose loans. The loan-to-value (LTV) ratio is based on the lower of the contract price or the appraised value. In this case, the LTV will be based on the value of $235k and the buyer will need to bring in the difference.

    If they are putting 40% down, they need to put down 40% of $235,000 (which is $94,000), plus the additional $15,000, for a total of $109,000.

    They can also put a lower % of the appraised value down, and the loan terms will be based on that LTV. With condos, depending on whether they will be occupying it as a principal residence or using it as an investment property, there is less scrutiny on the HOA at different LTVs. If it will be a primary residence, they can put as little as 3% down. It doesn't have to be 20%. But the % will always be based on the appraised value. If they put 3% down, that's $7,050, plus the additional $15,000, unless you agree to lower the purchase price.

    While the appraiser may have given the most weight to the sales price of the adjacent condo, they always use more than 1 comp.  They will use comps from other complexes.  They can't based an entire appraisal on only one other sale.  

    The buyer could try disputing the appraisal if the appraiser didn't make proper adjustments for condition. 


    exactly - not a complicated algorithm but standard practice, lenders will base their LTV (80% in this case) on the lower of appraised value and purchase price.

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  • Erik EstradaBusiness Member
    Lender · Member since 2022 · 6k+ posts · 1k+ votes
    3y
    Quote from @Sam Leon:

    I have a situation where the property I have listed appraised below contract price.

    This is a condo unit in south Florida with an HOA.

    As an example, the contract price is 250k, there is an adjacent condo that recently sold for 235K.  There is no other recently sold data point to use, that condo unit is the only single data point.  The buyer's lender ordered an appraisal, it came back with the 235K number.

    I had mentioned to the appraiser that the adjacent unit that sold for 235K sold for that number for good reasons. The owner is in Europe and wanted to get out quick, it has deferred repairs and maintenance issues, it was listed on the MLS and sold to a cash buyer sight unseen in less than one day. But the appraiser did what he did and came back with the same price. Fine.

    My understanding with conventional lending is, if the appraised price is 235K, then the lender will typically approves up to 80% of that which is 188K, this means the buyer will have to pay 62,000 of down payment to make up the difference to the contract price.  In this case, the buyer is paying a high down payment of 40% (100K) on the contract and asking 150K from the lender, which in my mind should cover more than the difference between the appraised value and contract price.

    But I was told that is not how this works.  In this case, the lender has asked the buyer to put up an extra $15000 (the difference between contract and appraised value), which prompted the buyer to ask for a price reduction because of the extra "out of pocket" cost to buyer.

    I am trying to understand this, because I did some asking around, and no one can explain this to me, why would the lender ask for extra money from the buyer to cover the difference if the buyer already has a high down payment that more than cover the difference?  The explanation I got is this is a complicated algorithm and unrelated to the down payment.  So I guess I am trying to understand how this works or is this just voodoo math?


     They will lend only up to  80% of the appraised value. So the buyer would have to cover 20% of the appraised value and the difference between the appraised value and the purchase price. 

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  • Stephanie MedellinBusiness Member
    Mortgage Broker · CA · Member since 2014 · 1k+ posts · 642 votes
    3y

    Just reading your question again -

    Say the buyer is still paying $250,000 and putting $100,000 down.  Originally that was 40% of the property value, but now the property value is only $235,000.

    $15,000 of the $100,000 is now going to cover the difference between the value and the purchase price, since the lender won't lend on that.

    Now the buyer has $85,000 left of the original $100,000.  That's 36.17% of $235,000.  So the buyer's down payment is 36.17%, not 40%, and he's paying the $15,000 difference in cash.

    I hope that makes sense.

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  • Caroline Gerardo
    Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes
    3y

    My guess is your HOA is not 51% owner occupied and may have small money on reserves or a pending lawsuit.

    If the HOA cannot go conventional the lender will offer loans at whatever loan to value they consider meets the risk. The lower number either appraisal or sale price is what is used. Did the lender require 40% down to be able to get this product with the pricing (rate) that they agreed upon? Probably.

    Buyer may be able to still use the same amount of cash they planned for the down BUT the product doesn't match with what they started with. Interest rate will be higher if they only put 30% of the appraised value. It's the lower number that matters.

    Residential appraisers rely upon closed sales with a loan that are in past three months with similar square footage. If there was recent sale that is similar in size ~ that dominates the opinion of value. A willing buyer paid $235000. It is odd that they used that as number one comp as you state it was a cash deal. If there are other closed condos in nearby they can be used as the number 2, 3, or 4... comps. Buyer can give you a copy of the appraisal if they want. If there are no comps similar they will go a farther distance and adjust for the distance. Typically there are 5- 6 comps used and maybe two are pending sales. The market is not increasing, it's sliding down. 

    Did you use an agent? What comps did they see when you came up with asking price? If there were no comps this is the expected result with a loan. 

    Has buyer asked for concessions now that it came in low? How many offers did you have? The risk is if you put it back on the market the failed pending shows and you have to disclose that it came in low appraisal. I assume buyer is not FHA purchase with that 40% down- as if it was the FHA appraisal sticks on the property for six months. If they asked for concessions it's up to you to figure what it costs to carry the condo every day for another month or two and how hot the market is in that complex. Best of luck to you.

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  • Sam Leon
    OP
    Investor · Fort Lauderdale, FL · Member since 2012 · 1k+ posts · 465 votes
    3y

    Let me answer with what I know.

    Regarding the comps, there is no other sale of similar properties near by except that one which happens to be this single sale at the end of June 2023, and we knew a low sale price may be trouble for the appraisal.  I do not have visibility to the buyer's appraisal report so I don't know how it arrived at that number, my guess is that single sale was the biggest influence.  As a matter of fact, there are a few other similar properties listed nearby in addition to mine, all listed at prices higher then my contract price, and they all went from UNDER CONTRACT to ACTIVE again within the last week, and my guess is, the low sale price of this single unit, affected not just me, but it is what it is.

    Right now, the contract numbers look as follows:

    PURCHASE PRICE: 250,000

    INITIAL DEPOSIT: 25,000

    ADDITIONAL DEPOSIT: 75,000

    FINANCING: 150,000

    My understanding is the lender will only approves 80% of the appraised, so that will be 0.8*235,000 = 188,000

    Since 188,000 is less than the 150,000 the buyer is asking, the appraisal should not be a show stopper.  I accepted the offer partly because of the high deposit, because I thought that makes the offer a strong one, less likely to run into a lending hurdle.

    But reading what I am reading here, that regardless of the down payment amount or percentage, the lender requires from the buyer the difference between contract and appraised value, the 15,000, so the buyer has to pay 100,000 + 15,000 = 115,000 at closing.

    If that is the case, then it would be better for the buyer to not use such a high deposit, instead put down 10,000 for initial deposit and another 20,000 for additional deposit, ask to finance 220,000.  When the appraisal comes out to 235000, and the lender says I can only approves up to 188,000 and you need to make up the difference with cash and put up an additional 15,000, then do it at that time it would still be less than the 100,000 he already put into escrow, right?

    Unless the high deposit was done for a reason I don't know about, such as favorable rates, or bad credits, or other whatever, and the appraisal coming in low represented added risks.

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  • Sam Leon
    OP
    Investor · Fort Lauderdale, FL · Member since 2012 · 1k+ posts · 465 votes
    3y
    Quote from @Stephanie Medellin:

    Just reading your question again -

    Say the buyer is still paying $250,000 and putting $100,000 down.  Originally that was 40% of the property value, but now the property value is only $235,000.

    $15,000 of the $100,000 is now going to cover the difference between the value and the purchase price, since the lender won't lend on that.

    Now the buyer has $85,000 left of the original $100,000.  That's 36.17% of $235,000.  So the buyer's down payment is 36.17%, not 40%, and he's paying the $15,000 difference in cash.

    I hope that makes sense.


    That make sense, but the confusion I have is since I have always assumed the 80% LTV ratio, I thought that when 80% of the appraised value (188K) is higher then the financed amount (150k), then there is no issue, but apparently there still is.

    On hypothetically, if the purchase price is 250K, and the buyer is paying 90% down, which would be 225K, and the property appraised to 235K, the bank would still ask the buyer to put up 225K plus the 15K, making the total to be 240K?

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  • Stephanie MedellinBusiness Member
    Mortgage Broker · CA · Member since 2014 · 1k+ posts · 642 votes
    3y

    There really shouldn't be an issue - there aren't too many loan programs that would require 40% down unless it's a hard money loan and in really poor condition.  

    The buyer can still put $100,000 down and borrow $150,000, it will just be a lower percentage of the purchase price.  It may change interest rates slightly, but 35% down compared to 40% down should be fairly minimal, if there's any difference at all.  It really shouldn't stop the deal from getting done.

    Hypothetically if the buyer HAD to put 90% down, it would be 235,000 x 90% = $211,500.  Then $211,500 + 15,000 = $226,500. 

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  • Caroline Gerardo
    Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes
    3y

    "My understanding is the lender will only approves 80% of the appraised" this might not be the case. The loan product might only offer 60% of appraisal which is lower. The complex might only qualify with 40% down was my thought. It's called a non-warrantable condo and is probably the real reason why the $235000 sale happened recently (they sold quick to get out). Your condo filled out a condo certificate, ask for a copy of it (buyer paid $500 or $1000 for it) YOUR AGENT should be able to negotiate the problem and seems like agent is failing you. This will tell you what the percent of owner occupied units there are, if there is a pending lawsuit, and how much reserves are available. Or ask a Board member these questions. Look at the master insurance policy - what does it cover dollar amounts?

    Probably not a debt to income ratio problem as the payment will be lower. They probably do not have the extra cash to make up the gap. 

    If there are no other comps I say again a new appraisal or arbitration is a waste of time and money. I've gotten appraisals up when they made errors and increased values 20- 25% this is not the case. 

    You have a couple choices: Cancel and pray the next buyer is all cash and never orders an appraisal. Take it off the market and get a better agent but wait 60 days for the $235000 sale price to become stale or older, also praying a new higher comp closes but it sounds like other condos are struggling and the market will now lower to a new normal. Make a compromise with this buyer- give them $5000 cut or something to make it close. Meanwhile get the Condo Certificate, the CCR's, budget, bylaws, and find out what the problem is with the HOA. Sorry to say Florida has had huge insurance claims you have seen on the news. The insurance probably tripled and they didn't have the reserves and went with lower coverage. Get on the Board if you decide to hold and be in control. I've seen management companies who are the kids of Board members/ approvals to trim a tree for $50000/ types of bad money management occurs in HOA's.

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  • Anthony Nicholas
    Member since 2023 · 1 post · 1 vote
    3y

    I think this is a negotiation tactic by your buyer to try and get a price reduction due to a low appraisal. For the appraiser - can you demonstrate that there were multiple offers over $235k? That is one thing he/she could consider. Is there a lack of other sales in your development? What about a competing development close by with similar amenities and same school district? That evidence and those additional sales should tell the story. Back to your buyer... They have more than enough down payment to cover the 'appraisal gap' between THEIR offer and the appraisal. The LTV is a little bit higher now due to the low appraisal but to my knowledge there should not be any negative affect to their interest rate or loan terms. The payment doesnt even change and they should not need to bring $1 extra to closing from their original financing terms. I know some lenders, realtors and attorneys who really dont understand this concept so this is a very common question and I hope this answer helps you. Feel free to reach out to me with any other questions. I am on instagram at https://www.instagram.com/then...

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  • Darnell Lockett
    Real Estate Consultant · Miami · Member since 2023 · 165 posts · 62 votes
    3y

    Hi @Sam Leon. There's really nothing too complicated about the LTV. It's based on the lower amount of the sales price or appraised value. Something to think about here in Miami and Florida in general with condos. The guidelines for lending on them have become tighter. Feel free to shoot me a message or give me a call if you have any questions.

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  • Sasha MohammedPro Member
    Lender · Costa Mesa, CA · Member since 2018 · 337 posts · 245 votes
    3y

    @Stephanie Medellin has this spot on! 

    In this situation, looks like the buyer does not need to come in with any more cash than originally planned, it would just be allocated differently than originally planned and may make a small impact to the interest rate. 

    The bank asking the buyer to put down the extra $15k would only be in efforts to maintain the 40% LTV. which, in this case, with the little info we have, doesn't seem necessary.

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  • Matt Howard
    Lender · Grand Rapids, MI · Member since 2022 · 6 posts · 0 votes
    3y
    Quote from @Sam Leon:

    I have a situation where the property I have listed appraised below contract price.

    This is a condo unit in south Florida with an HOA.

    As an example, the contract price is 250k, there is an adjacent condo that recently sold for 235K.  There is no other recently sold data point to use, that condo unit is the only single data point.  The buyer's lender ordered an appraisal, it came back with the 235K number.

    I had mentioned to the appraiser that the adjacent unit that sold for 235K sold for that number for good reasons. The owner is in Europe and wanted to get out quick, it has deferred repairs and maintenance issues, it was listed on the MLS and sold to a cash buyer sight unseen in less than one day. But the appraiser did what he did and came back with the same price. Fine.

    My understanding with conventional lending is, if the appraised price is 235K, then the lender will typically approves up to 80% of that which is 188K, this means the buyer will have to pay 62,000 of down payment to make up the difference to the contract price.  In this case, the buyer is paying a high down payment of 40% (100K) on the contract and asking 150K from the lender, which in my mind should cover more than the difference between the appraised value and contract price.

    But I was told that is not how this works.  In this case, the lender has asked the buyer to put up an extra $15000 (the difference between contract and appraised value), which prompted the buyer to ask for a price reduction because of the extra "out of pocket" cost to buyer.

    I am trying to understand this, because I did some asking around, and no one can explain this to me, why would the lender ask for extra money from the buyer to cover the difference if the buyer already has a high down payment that more than cover the difference?  The explanation I got is this is a complicated algorithm and unrelated to the down payment.  So I guess I am trying to understand how this works or is this just voodoo math?


     Do you know the new buyer is putting 20% down? For a condo there is a pricing adjustment when borrowing over 75%. They may need this 15K brought to close to offer the same terms.


    If 20% is down payment then borrower may proceed with the same down payment but would then have PMI.

    The bank will base LTV off less or sales price or appraisal.

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