Appraisal low w/ mortgage contingency & no appraisal contingency

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Appraisal low w/ mortgage contingency & no appraisal contingency

Felix Stone
Rental Property Investor · Member since 2020 · 35 posts · 18 votes

Hi All - A friend told me about this site and there is a wealth of info but couldn't find what I was looking for. 

Context

I put in an offer on 4 off market properties in Pennsylvania. Offer is for the total price and all the properties are listed on one contract so eg - I put in an offer of 400K and listed all the 4 properties in the AOS. Offer got accepted and I am getting individual loans from the bank on each property. Offer is the standard PA contract and has a mortgage contingency with $300k loan price. However it does not have an appraisal contingency. 

The bank is asking for individual prices of the property for these individual loans. 

I am pretty sure the appraisal for all 4 combined will come around $360k( the numbers worked for me still so I went for it, also I think I rushed :()

Question 1

What should I give the bank as individual property prices knowing they will get an appraisal for each property? anything to look out for here?

Question 2

If(or when) the appraisal comes in lower than $400k combined(lets say $360k) and so assuming the bank will now not loan $300k at 75% LTV per the AOS, would I be able to ask the seller to lower the asking price and if they don't (and I don't want to pay up the $40k difference), could I back out of the deal without losing my 12k total deposit?


Hoping for quick responses since I have not send the EMD yet. Thank you so much in advance for taking time on a Sunday to help out.

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Patricia Steiner
Real Estate Broker · Hyde Park Tampa, FL · Member since 2019 · 2k+ posts · 3k+ votes
6y

@Felix Stone

You should always have an appraisal contingency. It lets all sides know that if a property doesn't appraise, either the price has to be lowered or the buyer walks with return of escrow. The mortgage contingency is different: it's about you - and your ability to secure financing.  It comes with requirements that you have to meet by certain dates or the seller can cancel the contract on you.  A mortgage contingency does not force the seller to negotiate with you. Neither does an appraisal contingency.  In my market where inventory is so tight, sellers aren't budging on price. Bottom line: You cannot force a seller to renegotiate with you or sell at a price that is not acceptable to the seller.  

Do yourself a favor and provide yourself with every contingency possible. An appraisal contingency is common; no one will balk at it but in a seller's market, the seller can just wait for the next buyer, a different appraisal, possibly a different outcome - rather than negotiate with you.  

Just is...I do think you would have had better odds if each property had been separately priced and contracted considering that's how you're financing the acquisition. The way it is now doesn't give you room to whine because it's a blended purchase and value.

Should be an entertaining ride...

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  • Mike McCarthy
    Investor · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    6y

    When I've done refi mortgages, the application is for an estimated value of the house. Once the appraisal comes in, the loan amount can go up or down based on the 70% or 75% LTV agreement.

    In your case, I would talk to your loan officer to help ensure that all the loans need to balance out to the $300K. I would asusme they can adjust the loans as needed as long as the LTV across the board meets their needs. But it's a bit 'out of the ordinary', so might need to work with them to figure out how to do it.

    1Reply
  • Felix Stone
    OP
    Rental Property Investor · Member since 2020 · 35 posts · 18 votes
    6y

    Thanks, @Mike McCarthy. That makes sense. Here are the terms in Section 8 of the contract as you might be aware already.Do you mean if the appraisal comes in low, the bank might still go up to $300k loan amount if I am paying a downpayment of $100k already per the LTV term below?

    (A) This sale is contingent upon Buyer obtaining mortgage financing according to the following terms:
    84 First Mortgage on the Property
    85 Loan Amount $300,000
    86 Minimum Term years 25 years
    87 Type of mortgage Conventional
    88 Loan-To-Value (LTV) ratio:
    89 For non-FHA/VA loans LTV ratio not to exceed 75%

    Thanks so much for you insight.

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  • Patricia Steiner
    Real Estate Broker · Hyde Park Tampa, FL · Member since 2019 · 2k+ posts · 3k+ votes
    6y

    Prices.  You need to tell the bank that you don't have a contract price for each individual property.  They're trying to put your non-customary deal into a customary box and they're going to have to punt.  The Purchase Contract is the determinant.

    Appraisal.  Since you do not have an appraisal contingency, you don't have the option of going back to the seller to have him either lower the price or you walk with the return of your escrow.  What you do have is a Mortgage Contingency.  You could go back to the Seller and advise that you do not qualify for financing at the amount noted on the contract due to the failure of the properties to appraise. That contingency allows you to walk with return of your escrow so you might be able to do a "I'm not trying to get out of this purchase; can we negotiate a way to get the deal done?"  

    Read your Purchase Contract - especially as it pertains to the Financing to make sure you have that mortgage contingency language in it. I've never seen a contract that didn't offer that buyer protection so I'm hoping yours won't spoil my record.

    Hope this helps...

    1Reply
  • Felix Stone
    OP
    Rental Property Investor · Member since 2020 · 35 posts · 18 votes
    6y

    Thanks @Patricia Steiner. Attaching the mortgage section here and I think I do have the right language in there to use financial contingency as leverage.. This indeed helps. Part where I am unclear now is that if the mortgage contingency gives me room to negotiate with the seller after appraisal comes low, do I ever need an appraisal contingency?

    0Reply
  • Patricia Steiner
    Real Estate Broker · Hyde Park Tampa, FL · Member since 2019 · 2k+ posts · 3k+ votes
    6y

    @Felix Stone

    You should always have an appraisal contingency. It lets all sides know that if a property doesn't appraise, either the price has to be lowered or the buyer walks with return of escrow. The mortgage contingency is different: it's about you - and your ability to secure financing.  It comes with requirements that you have to meet by certain dates or the seller can cancel the contract on you.  A mortgage contingency does not force the seller to negotiate with you. Neither does an appraisal contingency.  In my market where inventory is so tight, sellers aren't budging on price. Bottom line: You cannot force a seller to renegotiate with you or sell at a price that is not acceptable to the seller.  

    Do yourself a favor and provide yourself with every contingency possible. An appraisal contingency is common; no one will balk at it but in a seller's market, the seller can just wait for the next buyer, a different appraisal, possibly a different outcome - rather than negotiate with you.  

    Just is...I do think you would have had better odds if each property had been separately priced and contracted considering that's how you're financing the acquisition. The way it is now doesn't give you room to whine because it's a blended purchase and value.

    Should be an entertaining ride...

    2Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    6y

    You have the mortgage contingency.  Explain to the bank it is a package deal and they can then take the appraisal prices for each of the 4 properties, add them up and see how close to $400K it is. If as a group they appraise low, go back to the seller and have them adjust the sales price to match.

    1Reply
  • Marc Winter
    Real Estate Broker · Northeast PA · Member since 2017 · 2k+ posts · 2k+ votes
    6y

    @Felix Stone, Something doesn't seem to be adding up here.  In your post, you state you are buying the properties for a total of $400K with a mortgage of $300k.  But your mortgage contingency shows a mortgage amount of $450K.

    Unless I'm misreading or misunderstanding your post or your documentation, there is NO BANK that will loan over 100% of the purchase price on an investment property package.  

    Another mistake (oversight) is a lack of mortgage commitment date. 

    The form looks like the PAR agreement for sale form, and it is permissible to be used by anyone, but I have to wonder who filled in the blanks on this contract?

    1Reply
  • Felix Stone
    OP
    Rental Property Investor · Member since 2020 · 35 posts · 18 votes
    6y

    @Marc Winter Sorry, looks like I attached a screenshot of a different contract, which was not fully filled out so no settlement date. 

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